In light of persistent challenges related to growth and inflation, the European Central Bank (ECB) is contemplating a more aggressive approach to interest rate reductionsRecent surveys reveal shifting expectations among analysts, who now predict that the ECB will lower its deposit rate by 25 basis points during each upcoming policy meeting, reducing it to 2% much sooner than previously forecastedInitially, predictions indicated that reaching this rate would take a year; however, the revised outlook underscores worrying underlying issues within the Eurozone economy, with both the service and manufacturing sectors experiencing declines, leaving businesses and consumers in a state of uncertainty.

The risks associated with these economic conditions are becoming more pronouncedSenior Eurozone economist David Powell believes that a 25 basis point cut by the ECB on December 12 is likely, with policymakers expected to adopt a dovish stance throughout 2025 as both inflation and GDP growth prospects appear increasingly bleak

Such sentiments among analysts have sparked market speculation about the possibility of more significant interest rate cuts by the ECBHowever, while a few officials have expressed openness to larger decreases, the majority— including some prominent doves—stand firm in their preference for a gradual approach.

The overall consensus among economists leans toward a cautious adjustmentOnly JPMorgan has gone on record predicting a 50 basis point cut in December, highlighting a divergence of opinion within the economic communityBill Diviney from Dutch Bank remarked, “There are ample justifications for policy easing, but the urgency for a 50 basis point cut is not evident at this point.” The more plausible scenario is an adjustment to the ECB's official policy statement, which currently emphasizes maintaining sufficiently restrictive rates as necessary.

Surveys suggest that about 53% of respondents anticipate a shift in the policy wording from the ECB, although only a third expect clearer guidance on the trajectory of interest rates

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Analysts at AFS Group, including Arne Petimezas, foresee that the ECB will gradually lean towards a more neutral policy stanceSuch a shift necessitates broad consensus among officials regarding how much rates should decline to signal a transition from a tightening to a loosening policy frameworkDespite divergent views within the governing council, Chief Economist Philip Lane has indicated that optimal interest rate levels should hover between 1.5% and 2.5%.

The views on the neutral interest rate are somewhat narrow, with the majority of respondents agreeing on a range between 2% and 2.5%. Interestingly, nearly two-thirds of surveyed participants predict that interest rates will start to provide stimulus by the end of the following yearNotably, only 11% anticipate that policy will remain tight moving forward.

Carsten Brzeski from Dutch Bank pointed out that the current restrictive monetary stance of the ECB presents a risk factor, particularly given underlying structural issues, potential fallout from the U.S.-led trade war, and political instability within France

These challenges have contributed to rising bond yields in the Eurozone’s second-largest economy, with the yield spread on ten-year bonds between France and Germany nearing levels reminiscent of the 2012 European debt crisis.

Despite the adverse economic indicators, a mere 8% of respondents foresee the ECB implementing a plan aimed at countering excessive market volatility—termed the Transmission Protection Instrument (TPI)—within the next 12 monthsOne of the primary tests for ECB President Christine Lagarde in the coming week includes clearly asserting that no TPI intervention measures will be taken without alarming the markets.

The majority of analysts expect the ECB to revise down its economic growth forecasts for 2025 and lower its inflation expectations for both this year and the nextA significant number, near two-thirds, consider the risks of inflation falling below the 2% target to be greater than those related to exceeding this threshold—an increase from 55% just two months prior

The looming uncertainty tied to U.Spolicies and geopolitical tensions is commonly cited as the most substantial economic threat, as illustrated by Marco Wagner from CommerzbankGiven that forthcoming U.Spolicies remain vague, such analyses require careful navigation amid considerable uncertainty.

However, a consensus seems to emerge around the idea that inflation may not see substantial impacts from current ECB actions, effectively placing the central bank in a challenging positionDennis Shen of Scope Ratings underscored the necessity for policymakers to guarantee adequate monetary support for the Eurozone economy to mitigate recession risks while also addressing the danger of long-term inflation falling short of expectationsNonetheless, the ECB must balance this with the imperative to maintain sufficiently restrictive policies in the short term to combat any potential new inflationary pressures resulting from tariffs.