Europe's weakening economy seals ECB rate cut, economists say
Despite mixed signals from European Central Bank (ECB) officials, the central bank may ultimately have no choice but to lower interest rates.
The European Union’s statistics office recently revised eurozone economic growth down to 0.2% in the second quarter, compared to an initial estimate of 0.3%.
The downward revision is largely thanks to weaker output from France—the eurozone’s second-largest economy—and Ireland.
Making matters worse, eurozone growth weakened compared to the first quarter, putting the economic bloc further behind the U.S. and U.K.
Even before the downward revision, Vanguard economists pegged eurozone growth at a dismal 0.8% in 2024.
Vanguard said it expects the weak performance to continue into the third quarter due to a prolonged manufacturing slump.
“On the back of the weaker growth outlook, we now believe that the ECB will step up the pace of easing,” beginning in September, wrote ING Bank’s chief economist Peter Vanden Houte.
Bloomberg economists, likewise, expect the ECB to cut interest rates at its upcoming meeting on Sept. 12. Bloomberg’s senior economist, David Powell, said further cuts in December are also on the table.
As Creditnews recently reported, ECB officials have been at odds about how to proceed with interest rates.
The latest economic figures, however, are likely to favor advocates for lower interest rates who believe the central bank should prioritize the economy.
Is it time to shift focus?
Ironically, the ECB’s lack of consensus on monetary policy came after officials voted to lower interest rates in June for the first time in five years.
Certain members of the ECB’s Executive Board, such as Estonia’s Isabel Schnabel, believe stubborn inflation has made it harder for the central bank to navigate interest rates.
She worries that the ECB may abandon its effort to combat inflation “too early.”
Gabriel Makhlouf, the Governor of the Central Bank of Ireland, agrees with Schnabel, arguing that the “road has been bumpy” in reversing inflation.
Both policymakers are especially concerned with service prices, which continue to vastly exceed the central bank’s 2% target.
In August, service prices rose at a 4.2% annual rate, the highest since last October.
Yet, Italian Board members Piero Cipollone and Fabio Panetta believe inflation concerns are largely overblown and that the real focus should be on stimulating growth.
In August, Panetta said recent progress on inflation makes rate cuts a “reasonable” expectation.
Meanwhile, Cipollone said focusing too much on inflation puts the eurozone economy on a dangerous path that could lead to a recession.
“Europe desperately needs growth” and new investment, said Cipollone. Every delay in cutting rates “puts us at a serious disadvantage.”
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