ECB Rate Cuts Expected Amid Economic Weakness and Political Uncertainty
Image: Wikipedia
The European Central Bank (ECB) is anticipated to reduce interest rates once more this week, as the economic outlook darkens. Political instability in the eurozone’s two largest economies further complicates the situation.
This would mark the ECB’s third consecutive rate cut, aimed at encouraging lending to stimulate consumer spending and business investment across the 20 euro-using countries.
After aggressively raising rates from mid-2022 to combat soaring energy and food prices, the ECB is now shifting its focus to rate cuts due to easing inflation and a weakening eurozone economy.
Recent disappointing data has led to speculation that the ECB might implement a significant half-percentage-point cut for the first time in this easing cycle during its meeting on Thursday. However, with inflation pressures still present—having rebounded above the ECB’s 2% target in November—most analysts now predict a quarter-point cut.
“While there is a strong case for the ECB to accelerate the pace of policy easing by delivering a half-point cut, a majority of the governing council seems to prefer a quarter-point reduction,” noted Capital Economics.
This upcoming cut will be the ECB’s fourth since June, bringing the key deposit rate down to 3%.
ECB officials have consistently expressed concerns about the weakening growth outlook in the eurozone, indicating a shift from their previous focus on reducing inflation.
Eurozone inflation peaked at 10.6% in late 2022, driven by the aftermath of Russia’s invasion of Ukraine and post-pandemic supply chain issues. Although it fell below the ECB’s 2% target in September, it rose again to 2.3% in November.
ECB President Christine Lagarde has emphasized that she will not commit to a specific path for rate cuts. In a recent European Parliament hearing, she stated that recent data suggests weaker short-term growth, due to slowing services sector growth and continued manufacturing contraction.
Analysts expect the ECB’s updated economic forecasts, to be released alongside the rate decision on Thursday, to reflect a weaker outlook with slight downward revisions to growth and inflation estimates.
Political challenges add to the complexity for ECB policymakers. Germany faces early elections in February following the collapse of Chancellor Olaf Scholz’s coalition, while France’s Prime Minister Michel Barnier recently resigned after losing a no-confidence vote, exacerbating the country’s political and financial turmoil.
The ECB’s decision will precede the US Federal Reserve’s next rate-setting meeting on December 17-18, where another rate cut is anticipated.
