The European Central Bank has been too slow to cut interest rates to help the struggling Eurozone economy, most economists polled by the Financial Times have warned.
Almost half of the 72 Eurozone economists surveyed – 46 percent – said the central bank “fell behind the curve” and was not in line with the fundamentals of the economy, compared to 43 percent convinced that the ECB's monetary policy “is on the right track.”.
The rest said they didn't know or didn't answer, while not a single economist thought The ECB “it was ahead of the curve”.
The ECB has cut rates four times since June, from 4 to 3 percent, as inflation has fallen faster than expected. During that time, the economic outlook for the financial sector continued to weaken.
ECB president Christine Lagarde has admitted that rates will need to fall further next year, amid expectations of a shortage. The growth of the Eurozone.
The IMF's latest forecast shows the financial bloc's economy growing by 1.2 percent next year, compared to an expansion of 2.2 percent in the US. Economists polled by the FT are more pessimistic about the Eurozone, expecting growth of just 0.9 percent.
Analysts expect that the divergence in growth will mean that Eurozone interest rates end the year significantly lower than US borrowing costs.
Price-setters at the Federal Reserve expect to reduce borrowing costs just twice a quarter next year. Markets are divided between four to five expectations of a 25 basis point cut from the ECB by the end of 2025.
Eric Dor, professor of economics at the IÉSEG School of Management in Paris, said that it is “clear” that “the risk of low real growth” in the Eurozone is increasing.
“The ECB has been very slow in reducing policy rates,” he said, adding that this had a negative impact on economic activity. Dor said he sees an “increasing likelihood that inflation may undercut” the ECB's 2 percent target.
Karsten Junius, chief economist at the bank J Safra Sarasin, said that decision-making at the ECB seems to be generally slower than at the Federal Reserve and the Swiss National Bank.
Among other things, Junius accused Lagarde of “consensus-based leadership” and “a large number of decision-makers in the governing council”.
UniCredit group economist Erik Nielsen noted that the ECB justified its hikes during the pandemic by saying it had to maintain inflation expectations.
“As soon as the risk of inflation evaporates, they (should) cut rates as quickly as possible – not in small steps,” Nielsen said, adding that monetary policy remains overly restrictive even though inflation has returned. trace.
In December, after the ECB cut rates for the last time in 2024, Lagarde said “the direction of travel is clear” and for the first time indicated that future rate cuts were possible – a view that has become common among investors. and analysts.
He gave no guidance on the pace and timing of future cuts, saying the ECB would decide on a meeting-by-meeting basis.
On average, the 72 economists polled by the FT expect inflation in the Eurozone to fall to 2.1 percent next year – just above the central bank's target and in line with the ECB's forecast – before falling to 2 percent in 2026, 0.1 percentage point above the ECB's forecast.
According to the FT survey, most economists believe that the ECB will continue at its current level of rate reduction in 2025, reducing the deposit one percent to 2 percent.
Only 19 percent of all economists polled expect that the ECB will continue to cut rates in 2026.
Economists' forecasts for ECB tapering are more hawkish than those valued by investors. Only 27 of the 72 economists polled by the FT expect prices to fall from 1.75 percent to 2 percent in the range expected by investors.
Not all economists believe the ECB has done too little. Willem Buiter, a former Citi economist and now an independent economic consultant, said that “the ECB's policy rates are very low at 3 percent”.
He noted the stickiness of the main inflation – which, at 2.7 percent, is more than 2 of the central bank's target – and recorded low unemployment of 6.3 percent in the financial area.
FT research has found that France has replaced Italy as the eurozone country most at risk of a quick sell-off and a rise in government bonds.
French markets have been weighed down in recent weeks by the past crisis Prime Minister Michel BarnierThe proposed budget to reduce the deficit, which led to the overthrow of his government.
Fifty-eight percent of survey respondents said they were most concerned about France, while 7 percent named Italy. That marked a dramatic change from two years ago, when nine out of ten respondents pointed to Italy.
“The instability of French politics, feeding the risks of populism policy and rising public debt levels, raises the specter of capital flight and market volatility,” said Lena Komileva, an economist at the consultancy (g+) economics.
Ulrike Kastens, chief economist at German asset manager DWS, said he remained confident the situation would not get out of control. “Unlike (during) the great debt crisis of the 2010s, the ECB has the option to intervene,” he said.
Despite concerns about France, the consensus among economists was that the ECB would not need to intervene in the euro area's bond markets by 2025.
Only 19 percent think the central bank is likely to use its emergency bond-buying tool, called the Transmission Protection Instrument (TPI), next year.
“Despite the turmoil in the French bond markets, we think there will be room for the ECB to implement the TPI,” said Bill Diviney, head of senior research at ABN AMRO Bank.
Additional reporting by Alexander Vladkov in Frankfurt
Data visualization by Martin Stabe