The lackluster European economy may convince the European Central Bank to continue slashing its interest rate for the fourth consecutive month to stimulate growth.
According to Bloomberg’s poll, data set to release on Thursday before the announcement of the new rate, shows gross domestic product (GDP) trickled up 0.1% in 4Q24, a slip from 0.4% in the previous quarter.
S&P Global business surveys released a week ago show a glimpse of a possible recovery. However, the central bank officials are highly confident in the direction of inflation, which is heading toward 2%, and were not convinced, especially with the return of President Donald Trump creating a significant amount of uncertainties among businesses and households.
Jeri Stehn, chief European economist at Goldman Sachs, said that the eurozone’s economy is more at risk with weakened growth rather than inflation, and the ECB should continue to reduce the rate to revitalize economic activity.
Among the European Economic and Monetary Union (EMU) 20 member states, France and Germany are among the biggest factors of economic weakness, as both countries were gripped by political upheaval. Q4 estimation shows a 0.1% decline for Germany, while France will likely stagnate.
Italy could see 0.2% of its growth, while Spain may expand 0.6% after a 0.8% gain in Q3.
Last week, members of the ECB’s Governing Council hinted that at least two more consecutive cuts to the policy rate will likely take place this week and in March.
The likely cause of the easing policy is that the borrowing costs have restricted economic activity. As the confidence is recovering and inflation stabilizes, the leash on the economy starts to become more of a liability.
Michala Marcussen, group chief economist at Societe Generale, said that while the outlook for 2025 growth remains bleak, it is still in positive territory, with the current state of the economy, a proper pace of rate cut should be 25 basis points per meeting.
The ECB’s deposit rate would sit at 2.5% after two more cuts, slightly above a range regarded by President Christine Lagarde as the neutral rate. The neutral rate, which does not restrict or stimulate growth, is an important milestone that officials use to set the policy rate.
In reality, the milestone is difficult to observe. The economist consensus puts it between 2-2.5%, which allows for further rate cuts after March. The median forecast settled the rates at 2, but year-end prediction may vary.
