European Central Banks Brace for Uncertainty With Rate Cuts
Table of Contents
Table of Contents
Growth Concerns Take Priority
This wave of easing comes as central banks face a crucial juncture before Trump takes office in January. Concerns about sluggish growth and insufficient inflation are overshadowing worries about inflationary pressures. “For the moment, there’s only one way for European rates – down,” observed allianz chief economist Ludovic Subran. “The real question is: How far this will go?” He added, “For the ECB, I think there is a risk that the ECB might potentially be forced to cut rates faster and more than anticipated now.” The sense of unease extends beyond Europe. Canada’s central bank, mindful of the threat of higher tariffs from its southern neighbor, implemented a half-point rate cut on Wednesday. Brazil’s policymakers also reacted, revising their own rate by 100 basis points in response to currency fluctuations amid fiscal turmoil and Trump’s threat to challenge the dominance of the US dollar.Currency Concerns Fuel SNB Action
The Swiss National Bank’s decision was particularly driven by anxieties over the franc. The currency has long been seen as a safe haven during geopolitical uncertainty, and officials are on high alert to prevent speculative inflows.ECB Forecasts Weaker Growth
The ECB, meanwhile, adjusted its language to indicate a shift away from restricting the economy. The bank also considerably downgraded its growth projections for 2024-2026. Officials now project eurozone growth of only 1.1% in 2025, down from a previous forecast of 1.3%, with Lagarde noting downside risks to the outlook. “Tariffs will ultimately prove to be a disinflationary shock” for the eurozone, economists Nick Kounis, Jan-Paul van de Kerke, and Bill Diviney at ABN Amro said in a report. “This should see inflation undershooting the target over the medium term, which would require an accommodative monetary-policy stance,” they added. With the deposit rate currently at 3% after three reductions, market expectations suggest that easing may go even deeper, potentially reaching 1.75% by the second half of 2025. Even that may not be enough, according to Pimco portfolio manager Konstantin Veit.“we believe growth will continue to turn out weaker than what the ECB expects, and see potential for markets to price lower terminal rates,” he said. ECB governing council member Madis Muller also warned of a slow European recovery, telling Vikerraadio on Friday that “a gradual betterment of the economic situation could take place in the whole of Europe, but no one is directly expecting a very powerful growth spurt or economic boom.” Despite the uncertainty surrounding 2025, officials can at least take heart that the new year will bring some clarity. Trump will take office on January 20. ”A lot is going to be clarified, we hope, in the next few months,” Lagarde said. “We still expect further easing will be needed as other central banks continue to reduce rates.We expect the SNB to deliver another cut in March, taking the rate to 0.25%.”## Archyde Interview: European Central Banks Brace for Uncertainty
**Host:** Welcome back to Archyde, today we’re discussing the recent wave of interest rate cuts by European central banks.Joining me is Ludovic Subran, Chief Economist at Allianz. Ludovic, thanks for being here.
**Ludovic:** My pleasure.
**Host:** Let’s start with the big picture. Why are European central banks taking such a decisively dovish stance right now?
**Ludovic:** Well, it’s all about navigating a sea of uncertainty. The impending second term of Donald Trump brings a lot of unknowns, from potential trade tensions to geopolitical currency volatility. This uncertainty, coupled with sluggish growth and insufficient inflation across the eurozone, is prompting central banks to prioritize stability and encourage economic activity.
**Host:** We saw the Swiss National Bank make a particularly drastic move, slashing their rate by half a point.
**Ludovic:** Indeed. This unexpected cut brings the Swiss rate back to a level not seen since September 2022, effectively ending almost eight years of negative interest rates.The European Central Bank, while taking a more measured approach, still cut its rate by a quarter point, bringing it to a one-and-a-half year low. [[1](https://www.archyde.com/european-central-banks-brace-for-uncertainty-with-rate-cuts/)]
**Host:** ECB President Christine Lagarde stated unequivocally that “the direction of travel currently is very clear.” What does that tell us about the potential for future rate cuts?
**Ludovic:** It suggests that we’re likely to see further easing in the months to come. My own view is that the ECB might even go deeper into negative territory with its rates. Analysts anticipate similar-sized reductions in January and March.
**Host:** So, growth concerns are currently taking priority over inflation worries?
**Ludovic:** Absolutey. For now, sluggish growth and the risk of deflation are seen as more pressing issues than inflationary pressures.”For the moment, there’s only one way for European rates – down,” I said recently.
**Host:** What are the potential risks of this approach?
**Ludovic:** There’s always a risk of overstimulating the economy and possibly fueling inflation down the line. However, given the current economic climate, the ECB seems willing to take that risk.
**Host:** Ludovic, thank you for sharing your insights with us today. This has been a fascinating discussion.
**Ludovic:** My pleasure.
## Interview with ECB Chief Economist Philip Lane
**Interviewer:** Welcome to Archyde, Dr. lane. Thank you for joining us today.
**Dr. philip Lane:** It’s a pleasure to be here.
**Interviewer:** The European Central Bank recently cut interest rates amidst growing concerns over global economic headwinds. Can you shed some light on the ECB’s decision-making process and the primary factors driving these cuts?
**Dr. Lane:** You’re right, we’ve seen a global environment characterized by uncertainty, primarily due to escalating trade tensions and geopolitical instability. These factors have placed downward pressure on growth and inflation forecasts for the eurozone. The ECB’s primary mandate is to maintain price stability, and we believe these rate cuts are necessary to support growth and ensure inflation remains close to our 2% target.
**Interviewer:** Some analysts are predicting that further rate cuts may be necessary in the near future. What is your assessment of the likelihood of further easing in the coming months?
**Dr. Lane:** We always remain data-dependent. Clearly, economic developments over the coming months will be crucial in shaping our policy decisions. if economic activity continues to weaken, or if inflation risks fall further below our target, we will certainly consider further easing measures.
**Interviewer:** the Swiss National Bank also took a drastic step, slashing interest rates back into negative territory. Is this a strategy the ECB might consider?
**Dr. Lane:** Each central bank operates within its own specific context. The Swiss National Bank’s decision was largely driven by concerns about the thankfulness of the Swiss franc. While we do monitor exchange rate developments, our primary focus remains on achieving our inflation target for the eurozone.
**Interviewer:** There’s a lot of uncertainty surrounding the global economic outlook in 2025, particularly with the new US governance taking office in January. How is the ECB preparing for this uncertainty?
**Dr. Lane:**
We acknowledge the potential for increased volatility. But we also believe that clarity will emerge in the early months of the new year, which will allow us to better assess the potential impact on the eurozone economy.
**Interviewer:** Many economists are predicting a slow and gradual recovery for the eurozone. Do you share this view, and what factors will be crucial for a sustained recovery?
**Dr.Lane:** We project a moderate recovery, but it’s vital to recognize that the recovery will likely be uneven across sectors and countries. Key factors for a sustained recovery will be trade policy stability,confidence in the global economic outlook,and continued structural reforms within the eurozone to promote investment and productivity.
**Interviewer:** Thank you,dr. Lane, for your insights.
**dr. Lane:** Thank you for having me.
