Market News

By Jana Randow and Harumi Ichikura

(Bloomberg) -- The European Central Bank will cut interest rates more rapidly than previously envisaged to perk up an economy facing weaker growth and inflation, a Bloomberg survey showed.

Respondents predict a quarter-point reduction next week and at every policy meeting through June — taking the deposit rate to 2%. Earlier, they only saw that level being reached a year from now.

With projections for economic expansion and consumer prices set to be trimmed, a broad majority of analysts expects borrowing costs to be low enough by end-2025 to stimulate growth. Earlier, most only anticipated neutral settings.

The shift reflects emerging cracks in the euro zone’s 20-nation economy, where the services sector has followed long-troubled manufacturers into contraction and uncertainty is plaguing business and consumers alike.

Indeed, risks are on the rise. Political upheaval has left Germany and France without stable governments, rattling investors. Beyond Europe’s borders, wars are raging in Ukraine and the Middle East, and Donald Trump is threatening trade tariffs.

What Bloomberg Economics Says...

“The ECB is highly likely to lower rates by 25 basis points on Dec. 12 and members of the Governing Council are drawing battle lines for what will follow in 2025. While we don’t expect President Christine Lagarde to comment much on next year’s steps, the overall tone of her press conference is likely to be dovish – the outlook for inflation and GDP growth have both darkened since the ECB last met.”

—David Powell, senior euro-area economist. Click here for full preview 

The general sense of gloom has fueled speculation over whether the ECB could opt for a half-point cut — rather than continuing with the 25 basis-point steps enacted so far — when it sets rates Thursday in Frankfurt.

But while France’s Francois Villeroy de Galhau and Portugal’s Mario Centeno have signaled openness to such a move, most officials — including some top doves — support a gradual approach that’s widely perceived to mean quarter-point increments.

Economists agree. Only JPMorgan’s team predicts a half-point reduction in December. Jussi Hiljanen of SEB is the lone survey respondent anticipating a move of that magnitude in March.

“The case for easing is clear,” said Bill Diviney of ABN Amro. “But it’s hard to see the urgency for a 50 basis-point cut at this point.”

Indeed, data released Friday confirmed the 0.4% advance in gross domestic product in the third quarter, with signs that consumers are finally starting to power growth.

More likely for the ECB is a change in the official policy statement in which it currently commits to keeping rates “sufficiently restrictive for as long as necessary.”

About 53% of respondents say policymakers will adjust this wording, though only a third expects clearer guidance on where rates are headed.

“I expect new language that policy will likely gradually move toward neutral,” said Arne Petimezas, an analyst at AFS Group.

Such a declaration would need broad agreement among officials on how far rates can fall before the policy stance turns from restrictive to accommodative. While opinions within the Governing Council differ, Chief Economist Philip Lane puts that level at about 1.5% to 2.5%.

Respondents give a narrower range. Nine in 10 put the so-called neutral rate between 2% and 2.5%, with almost two-thirds predicting rates will be stimulatory by the end of next year. Only 11% expect policy to remain restrictive.

Already now, the ECB’s “still-restrictive monetary policy stance has become a risk factor,” ING’s Carsten Brzeski said, highlighting structural issues, the risk of a US-led trade war and France’s political strife.

The latter has driven up bond yields in the euro zone’s No. 2 economy, with the spread between its 10-year notes and comparable German debt close to levels last seen during Europe’s debt crisis in 2012.

Even so, only 8% of poll respondents expect the ECB to activate a program designed to counter excessive market moves, known as the Transmission Protection Instrument, over the next 12 months.

Among Lagarde’s biggest challenges next week is to “make clear that TPI interventions aren’t ahead — without spooking markets,” Martin Wolburg of Generali said.

A majority of survey respondents expects the ECB to cut its 2025 projection for economic growth and lower its inflation outlook for this year and next.

Almost two-thirds consider undershooting the 2% price target over the medium term to be a bigger risk than overshooting it. That’s up from 55% two months ago.

US policy and geopolitical tensions are seen as the largest economic threats.

“The biggest challenge of the ECB will be to get a grip on the short-, medium-, and long-term effects of Trump’s economic policies,” Commerzbank’s Marco Wagner said. “Such analyses can only be done with vast uncertainties as the forthcoming US policies are far from specific yet.”

Still, there seems to be a consensus that Trump’s tariffs will damp growth but not affect inflation much — putting the ECB in a tough spot.

“Policymakers will need to ensure there’s adequate monetary support for the euro-area economy to counter recession risks and mitigate any risks of inflation again undershooting in the longer run,” Dennis Shen of Scope Ratings said. “But the ECB will also need to sustain adequately tight policy in the near term to deal with any renewed inflation from counter-tariffs.”

--With assistance from Alexander Weber.

(Updates with GDP data in 10th paragraph.)