ECB forecast to cut faster to release economic shackles next year
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The European Central Bank will speed up interest rate cuts over the months ahead to bolster the economy, taking borrowing costs to levels that no longer restrict demand by the end of 2025, according to a Bloomberg survey.
With inflation now a touch below the 2% goal, analysts see the ECB decreasing its deposit rate by a quarter-point next week and at every meeting through March. Respondents then forecast two more reductions — in June and December — bringing the benchmark to 2%.
Almost half reckon rates will be neutral by that point, while about two-fifths expect them to be low enough to encourage economic expansion. The previous poll predicted the ECB’s cycle would end at 2.5% in September 2025.
The expectation shift mirrors a similar recalibration by financial markets — spurred by data pointing to a shakier economy and more rapid disinflation in the 20-nation eurozone. The Federal Reserve, meanwhile, kicked off its monetary-loosening campaign with an outsized half-point move.
“The ECB has achieved a higher level of confidence to reach the 2% target faster than expected, which is consistent with faster rate cuts in the short term,” said Hugo Le Damany and Francois Cabau at AXA Investment Managers.
“But that doesn’t mean they want to go below 2%, so they’ll have to manage medium-term expectations to avoid the market anticipating too many cuts.”
While money markets still see the ECB lowering rates by a quarter-point next week, their conviction on a follow-up reduction in December has weakened. Expectations for the terminal rate have also risen, with traders now seeing it above 2% by the end of next year, compared with 1.75% a week ago.
Lagarde will undoubtedly get a lot of questions in the press conference about the next steps. She’s likely to continue to emphasize that the ECB is completely data-dependent and is operating on a meeting-to-meeting basis. However, another cut in December seems highly likely.” — David Powell, senior euro-area economist.
About two-thirds of survey respondents expect the ECB to reiterate next Thursday that the Governing Council will keep policy “sufficiently restrictive” for as long as needed to ensure inflation reaches — and stays at — 2% in the medium term.
While price gains dipped below 1.8% in September for the first time since 2021, officials have warned that they’ll creep up again in the coming months, especially as pressures in the services sector continue to linger.
“Given ongoing high wages and a still-tight labour market, and the uncertainty regarding the re-pricing of services items next year, we think that the ECB will remain cautious,” HSBC’s Fabio Balboni said.
“Even though we expect the ECB to speed up the pace of cuts in the next few meetings, uncertainties remain on the landing zone for inflation next year.”
ECB forecasts last month showed the inflation target being met in the final quarter of 2025. Since then, economists say downside risks have begun to pile up. A small majority — 55% — believes undershooting that level in the medium term is now a bigger danger than exceeding it.
Many respondents, however, cautioned that a return to 2% isn’t yet assured.
While the labour market is showing signs of easing, unemployment remains at a record low. Wages are also still growing at a healthy clip, and — highlighting that pay pressures won’t easily recede — German public-sector workers are seeking an 8% boost even as the country’s economy shrinks for a second year.
The ECB’s “main challenge continues to be simultaneously managing the downside risks to growth — which have intensified — against persistent upward inflationary pressure from high wage growth,” said Bill Diviney, senior euro-zone economist at ABN Amro.
“But the risk balance looks to have tilted clearly toward growth worries.”
Indeed, hope for recoveries in household spending and investment — as well as a pickup in global trade — is fading. On top of all that, survey respondents see Europe’s biggest economic risks coming from geopolitical tensions and the potential return of Donald Trump to the US presidency.
In light of these, AlphaTerra Capital Chief Risk Officer Andreas Koutras considers the ECB to be “behind the curve.” He’s among the 49% of economists who predict rates will neither stimulate nor restrict the economy by end-2025.
The majority sees the neutral rate — which can only be estimated and can’t be measured — between 2% and 2.25%.
The fragility of the euro-area economy “supports arguments for a faster pace of easing,” said Dennis Shen, an economist at Scope Ratings.
But there are “meaningful uncertainties” beyond next week. In the US, there’s the trajectory of the economy, how the Fed acts and who’ll occupy the White House. Elsewhere, escalating Middle East tensions could stoke energy prices.
“Inflation remains anything but defeated,” Shen said. “This ought to force the ECB to stay cautious regarding its rate-cut decisions.”