ECB has been too slow to cut rates, Eurozone economists warn

The European Central Bank has been too slow to cut interest rates to help the Eurozone’s stagnating economy, many of the economists polled by the Financial Times have warned.

Almost half of the 72 Eurozone economists surveyed — 46 per cent — said the central bank had “fallen behind the curve” and was out of sync with economic fundamentals, compared with 43 per cent confident that the ECB’s monetary policy was “on the right track”.

The remainder said they did not know or did not respond, while not a single economist thought the ECB was “ahead of the curve”.

The ECB has lowered rates four times since June, from 4 per cent to 3 per cent, as inflation fell faster than expected. During that period, the economic outlook for the currency area continuously weakened.

ECB president Christine Lagarde has acknowledged that rates will need to fall further next year, amid expectations of lacklustre Eurozone growth.

The IMF’s latest projections show the currency bloc’s economy expanding by 1.2 per cent next year, compared with a 2.2 per cent expansion in the US. Economists polled by the FT are even more gloomy on the Eurozone, anticipating growth of just 0.9 per cent.

Analysts expect the divergence in growth will mean Eurozone interest rates end the year far lower than US borrowing costs.

Rate-setters at the Federal Reserve expect to cut borrowing costs by a quarter point just twice next year. Markets are split between expecting four to five 25 basis-point cuts from the ECB by the end of 2025.

Eric Dor, professor of economics at IÉSEG School of Management in Paris, said it was “obvious” that “downside risks for real growth” in the Eurozone were increasing.

“The ECB has been too slow in cutting policy rates,” he said, adding that this was having a damaging effect on economic activity. Dor said he sees an “increasing probability that inflation could undershoot” the ECB’s 2 per cent target.

Karsten Junius, chief economist at bank J Safra Sarasin, said decision-making at the ECB appeared to be generally slower than at the Federal Reserve and the Swiss National Bank.

Among other factors, Junius blamed Lagarde’s “consensus-oriented leadership style” as well as the “large number of decision makers in the governing council”.

UniCredit’s group chief economist Erik Nielsen noted that the ECB had justified its dramatic pandemic-era hikes by saying it needed to keep inflation expectations in check.

“As soon as the risk of de-anchoring of inflation expectations evaporated, they should [have] cut rates as fast as possible — not in small gradual steps,” said Nielsen, adding that monetary policy was still overly restrictive despite inflation being back on track.

In December, after the ECB cut rates for the final time in 2024, Lagarde said that the “direction of travel is clear” and for the first time pointed out that future rate cuts were likely — a view that has long been common sense among investors and analysts.

She did not give guidance over 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 that Eurozone inflation will fall to 2.1 per cent next year — just above the central bank’s target and in line with the ECB’s own prediction — before falling to 2 per cent in 2026, 0.1 percentage points above the ECB forecast.

According to the FT’s survey, the majority of economists believe that the ECB will continue on its current rate-lowering trajectory in 2025, lowering the deposit rate by another percentage point to 2 per cent.

Only 19 per cent of all polled economists expect that the ECB will continue to lower rates in 2026.

The economists’ forecast for ECB cuts is slightly more hawkish than those priced in by investors. Only 27 of the 72 economists polled by the FT expect rates to fall to the 1.75 per cent to 2 per cent range anticipated by investors.

Not all economists believe the ECB has acted too slowly. Willem Buiter, former chief economist at Citi and now an independent economic adviser, said that “ECB policy rates are too low at 3 per cent”.

He noted the stickiness of core inflation — which, at 2.7 per cent, is well above the central bank’s 2 per cent target — and record low unemployment of 6.3 per cent in the currency area.

The FT survey found that France has replaced Italy as the euro area country considered most at risk of a sudden and steep sell-off in government bonds.

French markets have been roiled in recent weeks by a crisis over former Prime Minister Michel Barnier’s proposed deficit-cutting budget, which led to the toppling of his government.

Fifty-eight per cent of survey respondents said they were most concerned about France, while 7 per cent named Italy. That marked a dramatic shift from two years ago, when nine in 10 respondents pointed to Italy.

“French political instability, feeding the risks of policy populism and rising public debt levels, raises the spectre of capital flight and market volatility,” said Lena Komileva, chief economist at consultancy (g+)economics.

Ulrike Kastens, senior economist at German asset manager DWS, said she was still confident that the situation would not spiral out of control. “Unlike [during] the sovereign debt crisis of the 2010s, the ECB has options to intervene,” she said.

Despite the concerns over France, the consensus among economists was that the ECB will not need to intervene in euro area bond markets in 2025.

Just 19 per cent consider it likely that the central bank will use its emergency bond buying tool, the so-called Transmission Protection Instrument (TPI), next year.

“Despite the likelihood of turmoil in French bond markets, we think there will be a high bar for the ECB to activate TPI,” said Bill Diviney, head of macro research at ABN AMRO Bank.

Additional reporting by Alexander Vladkov in Frankfurt

Data visualisation by Martin Stabe