The European Central Bank is under fire for dragging its feet on interest rate cuts as the Eurozone’s economy crawls toward stagnation.
Out of 72 economists surveyed, 46% reportedly believe the ECB has “fallen behind the curve.” They argue its policies don’t match the dire state of the economy. Only 43% said the ECB’s approach was “on the right track,” while a resounding zero respondents felt it was ahead of economic trends.
Since June, the ECB has trimmed rates four times, dropping them from 4% to 3%. These cuts followed a rapid decline in inflation, but instead of stabilizing the economy, the Eurozone’s outlook has weakened some more.
The International Monetary Fund (IMF) predicts the Eurozone economy will grow just 1.2% this year. The economists are even less optimistic, expecting a mere 0.9%. Meanwhile, the U.S. economy is predicted to grow at 2.2% in the same period.
Economists call ECB’s strategy too slow
Karsten Junius, chief economist at J Safra Sarasin, thinks the problem lies in how decisions are made. He pointed out the ECB’s governing council has too many members, making it slower than the U.S. Federal Reserve or the Swiss National Bank.
Junius also called out ECB President Christine Lagarde’s leadership style, which prioritizes consensus over speed. The bank’s cautious steps have not gone unnoticed either.
UniCredit’s chief economist Erik Nielsen said, “As soon as the risk of de-anchoring inflation expectations evaporated, they should [have] cut rates as fast as possible.” Instead, the ECB opted for gradual adjustments that critics argue are doing more harm than good.
Sluggish growth, inflation, and political risks
The gap between the Eurozone and the U.S. is growing, and economists expect the ECB to play catch-up for years. Markets anticipate the ECB will deliver four or five more 25 basis-point cuts by the end of 2025. This contrasts sharply with the Fed, which is only expected to lower rates twice late this year.
Average inflation in the Eurozone is predicted to drop to 2.1% this year, just above the ECB’s target. By 2026, inflation is forecast to reach 2%, but the path there is uncertain. Not all economists are on board with rate cuts.
Willem Buiter, a former Citi economist, said the ECB’s current 3% rate might already be too low. He pointed to core inflation sticking at 2.7% and the Eurozone’s record-low unemployment of 6.3%.
France has become another major headache for the ECB. For the first time, economists see France as more at risk than Italy for a sudden sell-off in government bonds. 58% of survey respondents named France as their top concern, compared to just 7% for Italy.
The change comes as French politics remain in chaos. A deficit-cutting budget proposed by former Prime Minister Michel Barnier sparked a crisis, leading to his government’s collapse. Economists are worried that rising debt levels and populist policies could trigger a financial crisis.
Lena Komileva, chief economist at (g+)economics, warned of “capital flight and market volatility” due to France’s instability. However, Ulrike Kastens of DWS was more optimistic, saying the ECB has tools to manage any fallout, unlike during the debt crisis of the 2010s.
ECB under pressure as inflation challenges loom
New inflation data expected could complicate the ECB’s task even further. Consumer prices are forecast to have risen 2.4% in December, up slightly from 2.3% the month before. Core inflation, which excludes energy and volatile items, is predicted to stay stuck at 2.7%.
Fuel costs are partly to blame for the stubborn inflation. Rising gas prices and looming U.S. trade tariffs add to the uncertainty. Lagarde has acknowledged the challenges but remains hopeful that inflation will hit the 2% target by late 2025.
In a video posted on X for Christmas, Lagarde said, “We have made significant progress in 2024 in bringing down inflation. Hopefully, 2025 is the year when we are on target as expected and as planned in our strategy.”
2024 was an eventful year, and 2025 promises to be just as exciting.
I wish you all a Happy New Year! pic.twitter.com/uFzMoQ23iB
— Christine Lagarde (@Lagarde) January 1, 2025
Still, investors and economists remain divided on how the ECB should proceed. Markets expect rates to fall to 1.75%-2% by 2026, but only 19% of economists believe the ECB will continue cutting that far into the future.
Meanwhile, the ECB has avoided giving clear guidance on the timing or pace of rate cuts. Lagarde’s “meeting-by-meeting” approach leaves analysts guessing. Investors are waiting to see if the bank will take bolder action or stick to its incremental strategy.
Despite mounting concerns, the ECB has yet to signal it will use its Transmission Protection Instrument (TPI) to stabilize bond markets. Only 19% of economists see the bank resorting to emergency measures this year, even with the risks in France and elsewhere.
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