The European Central Bank (ECB) is currently facing a challenging task of adjusting its monetary policy to the weakening economic conditions in the eurozone and rising geopolitical uncertainty. The primary goal remains stabilizing inflation at a target of around 2%. However, macroeconomic data and the political situation are pushing policymakers to consider more decisive credit easing than previously anticipated.
The deteriorating economic outlook in Europe, evidenced by a second consecutive decline in Germany’s GDP and weaker growth forecasts, is prompting investors and analysts to predict deeper interest rate cuts. Current market projections suggest that the ECB’s key rate will drop to 1.75% by 2025. Fidelity International even predicts a rate as low as 1.50%, while Pacific Investment Management Co. warns that further economic decline could lead to even more substantial reductions.
The ECB’s shift in rhetoric is already noticeable. Recent communications have removed references to maintaining “sufficiently restrictive” policy. New ECB forecasts indicate lower inflation and slower economic growth. In light of these changes, the prospect of gradual but consistent rate cuts emerges – potentially by 0.25 percentage points during upcoming meetings in January and March. Should macroeconomic conditions require it, the pace of easing could accelerate. Although a sharp 0.50 percentage point cut remains a contingency plan, the ECB favors a measured approach to avoid causing market panic and to adapt to shifting economic and political realities.
Broader International Context
Against the backdrop of the ECB’s monetary deliberations lies a broader international context. While the U.S. Federal Reserve and the Bank of England may pursue less aggressive rate cuts – estimated at around 80 basis points by the end of 2025 – the ECB may reduce rates by as much as 125 basis points. Such actions would widen the gap in monetary policy approaches between Europe and the United States. Adding to the uncertainty is the potential return of Donald Trump to the U.S. presidency, which could escalate trade tensions and compel European central banks to take more decisive protective measures.
Other central banks in Europe are also responding to rising risks. The Swiss National Bank (SNB) surprised markets with a 50 basis point rate cut, while the Danish central bank also opted for credit cost easing. These actions aim to protect local economies from potential trade and political disruptions. The SNB, in particular, is wary of excessive strengthening of the Swiss franc amid global uncertainty.
Multi-Dimensional Challenges
The ECB’s and other European monetary institutions’ actions are a response to multi-dimensional threats: weakening economic growth, political tensions in key European Union countries, and uncertain prospects for global supply chains and tariffs. At the same time, the European bond market, benefiting from the prospect of further rate cuts, has gained over 3% this year, outperforming the American and British markets, attracting the attention of long-term investors.
The ECB’s monetary policy is likely to continue on a path of gradual but clear easing. The final scale of rate cuts remains uncertain and will depend on macroeconomic conditions, political sentiment, and U.S. trade policies. In response to a weakening economy and rising geopolitical uncertainty, the ECB must maintain flexibility and readiness for decisive action if deeper intervention is necessary to ensure price stability and support economic growth.
Author: Krzysztof Kamiński, OANDA TMS Brokers
Source: CEO.com.pl
