ECB Expected to Continue Rate Cuts, Aiming for 2% by Mid-2025: Economists' Outlook

Economists are forecasting further interest rate cuts by the European Central Bank (ECB) as it seeks to stabilize the eurozone economy. The central bank will likely target a 2% interest rate by mid-2025. This follows the ECB's recent 25 basis point rate reduction, as President Christine Lagarde's focus on downside inflation risks and weak economic growth points to further easing measures in the coming months.

Lagarde's Dovish Tone Sparks Predictions of Continued Easing

Ruben Segura-Cayuela, European economist at Bank of America, highlighted Lagarde's dovish tone during her post-meeting press conference, suggesting the central bank's strategy aligns with maintaining a flexible approach to interest rate reductions. Lagarde's recognition of "more downside than upside risks to inflation" indicates the ECB's readiness for a series of rate cuts shortly.

Segura-Cayuela noted that the disinflationary process is progressing, indicating the possibility of consecutive rate cuts at each meeting until the deposit facility rate reaches 2% by June 2025. He also expects the ECB to reduce rates further, reaching 1.5% by the end of 2025, assuming no significant economic shocks arise.

Economic Growth Concerns Shape ECB's Future Strategy

Carsten Brzeski, Global Head of Macro at ING, echoed the ECB's cautious stance on economic growth. He noted that the eurozone's sluggish economic performance and concerns over inflation falling below target levels drive the central bank's policy. According to Brzeski, the ECB will likely continue easing its monetary policy until there is a marked improvement in growth or inflationary pressures.

"The ECB seems determined to bring rates to neutral levels as fast as possible," Brzeski said, signalling that rate cuts will persist as long as the eurozone's economy remains underwhelming.

Market Analysts Expect Gradual Easing to Continue

Analysts at Danske Bank shared a similar outlook, predicting that the ECB will maintain its rate-cutting trajectory. They forecast the central bank will bring rates down to 2% by late 2025, although they acknowledge that interest rates could drop below this level, depending on future economic conditions.

Goldman Sachs economists Sven Jari Stehn and Alexandre Stott echoed this sentiment, forecasting another 25 basis points cut in December. They pointed to weakening economic data as a justification for continued easing, and they anticipate that the ECB will pursue rate cuts at every meeting until mid-2025.

However, BBVA analysts Alejandro Cuadrado and Roberto Cobo issued a cautionary note. They anticipate rising commodity prices and exchange rate fluctuations could curb the ECB's ability to aggressively lower rates. They also expect inflation to accelerate, which may limit the scope of future cuts.

Euro Under Pressure Amid ECB's Easing Measures

As the ECB continues to signal a prolonged period of rate reductions, the euro is feeling the effects. Luca Cigognini, a market strategist at Intesa Sanpaolo, highlighted the currency's vulnerability to further declines due to the ECB's cautious growth outlook.

"With slower growth and rising downside risks, the euro remains exposed to new pressures," Cigognini noted.

In conclusion, while the ECB has not provided a concrete roadmap for future interest rate cuts, President Lagarde's emphasis on flexibility and data dependency has led economists to widely predict continued reductions in the months ahead. The central bank's focus on downside risks to inflation and weak economic growth suggests that a prolonged period of monetary easing lies ahead, with the ECB likely to maintain its path toward a 2% rate by mid-2025.