The European Central Bank (ECB) is not backing down. Borrowing costs are heading south in the Eurozone, and there’s no set limit to how far they’ll go. So Christine Lagarde, the President of the ECB, made it crystal clear during a recent speech that inflation has finally been brought to its knees—or close enough to make cuts the new reality.
“Even though we are not there yet, we are close to achieving our target,” she said. For the ECB, the target is simple: 2% inflation. After years of wild price spikes, inflation is finally showing signs of taming. Earlier this year, it briefly dipped below the goalpost but has since crept back over it.
The eurozone is no stranger to tightening policies, but the ECB has kind of shifted gears. Inflation in the services sector—a key driver of domestic price pressures—has sharply cooled, and that’s just the start.
Wage growth, often blamed for keeping inflation alive, is projected to slow to 3% next year. “That’s the level we generally consider to be consistent with our target,” Lagarde said.
Borrowers win, but the eurozone struggles
After four cuts, the ECB still isn’t ready to declare its policies loose. Rates remain high enough to squeeze economic activity, and the eurozone is feeling the pinch. Households are sitting tight, and businesses aren’t exactly splurging.
Lagarde expects the eurozone economy to grow by a mere 1.1% next year—a fragile number in an increasingly unpredictable environment.
There are global headaches too. Conflicts, political drama, and Donald Trump’s re-election in the U.S. have thrown the world into a state of unease. For European households, this uncertainty is a killer.
Lagarde acknowledged the impact, saying consumer sentiment is heavily influenced by both inflation and geopolitics. “The pessimism about real incomes should dissipate as the high-inflation episode moves further into the rear-view mirror,” she said.
The ECB isn’t the only one noticing the change. Investors are betting on consistent rate cuts, pushing the deposit rate to as low as 2% next year. And while no one is ruling out the possibility of a larger cut along the way, the ECB is playing it steady.
Officials have hinted that policy could hit a “neutral” level by mid-2025—a point where it neither stimulates nor restrains economic growth.
The neutral rate debate heats up
What exactly is the “neutral rate” anyway? That’s the billion-dollar question. The ECB has been chipping away at its key deposit facility rate, bringing it to 3% this week. But this might only be the halfway point. Markets are buzzing with speculation about where rates will finally settle.
Lagarde threw out a range (somewhere between 1.75% and 2.5%) but no one’s putting money on the lower end just yet.
The Austrian central bank’s Robert Holzmann, known for being hawkish, threw in his two cents. He told reporters there’s “no danger” in further cuts next year, provided the economy stays on track. That being said, some ECB officials are arguing for going below neutral if growth stumbles and inflation cools faster than expected.
France’s central bank governor, Francois Villeroy de Galhau, has said that sub-neutral rates might be on the table if the data points that way. It’s a delicate balancing act: inflation and economic growth are still closely watched, and any misstep could derail recovery efforts.
The ECB staff’s latest projections don’t exactly scream confidence. Inflation is expected to average just above the 2% target at 2.1% in 2025, with higher price rises in the earlier months.
Rate cuts, but for how long?
“These data suggest that there is scope for a downward adjustment in services inflation, and thereby domestic inflation, in the coming months,” Lagarde has said. Policymakers are also dropping hints about how quickly cuts could happen.
At a meeting in Frankfurt, the ECB’s Governing Council debated a larger, half-point cut but ultimately agreed on a quarter-point reduction.
Deutsche Bank’s economists are already betting on sub-neutral rates by 2025. Their baseline prediction? A steady march to 1.5% through smaller cuts. But they’re not ruling out larger moves either.
Not everyone is convinced. Moody’s Analytics expects the ECB to slow its pace after March next year. “We think that after March, the battle over how far to lower rates will start in earnest,” they said, predicting the last cut by June and rates leveling out at 2.25%.
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This articles is written by : Nermeen Nabil Khear Abdelmalak
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