Looking at euro area inflation and macroeconomic indicators, it is clear that two major rate cuts will not be enough. However, there is a recent belief of market participants that EURIBOR it will not return to zero, it will begin to fade slowly. The reason for this is concern about the euro area and the German economy, which is going deeper and deeper into recession. How realistic is it that interest rates will return to zero?
The ECB base rate is currently 3.5%, which is clearly not the bottom. The competition is re-emerging in the market, which gives more aggressive ECB interest rate cut forecasts. The market believes that the ECB will reduce it significantly at the end of 2024 and 2025. For example, forecasts show that 3 months EURIBOR The rate, which is 3.2%, will decrease to 2.92% in December this year, to 2.45% in March, to 2.17% in June, and to 1.98% in December 2025, which is currently the forecast of ‘ lowest point.
At the same time, some market participants say publicly that the euro area needs zero base interest rates again, as last seen in the 2nd quarter of 2022.
Although inflation in the Eurozone fell to 1.8% in September this year, which is in line with the ECB’s commitment to annual inflation of 2%, the problem of service inflation remains, hovering around 4%. As the Eurozone economy continues to deteriorate, it is likely that this challenge will be overcome.
The German economy is already in recession
While the Eurozone economy is largely stagnant, the German economy is in fact it is already in decline, moreover, it is deepening more and more. German industrial companies’ outlook on orders is currently as bad as August 2020 – German industry is operating in almost the same mode as Covid 19 during the pandemic. These problems also spill over into the business sectors of other EU countries, as well as other sectors of the German economy, such as services.
Pragmatically, to revive the economy, it would be healthy and beneficial for the Eurozone to return to very low interest rates for a while. However, at the same time, I do not think that the ECB will be willing to reach the zero level in this cycle of interest rate cuts.
Central banks, including the ECB, still have fond memories of the monetary policy experiments during the pandemic that led to a global inflationary shock after the pandemic ended. The ECB will be very cautious about cutting interest rates, and a majority of ECB board members will certainly not support the idea of zero interest rates, even if inflation and economic indicators point to the need for it. further interest rate cuts. It is very realistic that the base interest rates in the Eurozone will be reduced to 2%, but the limit below 2% is unlikely or practically unrealistic: the ECB will fear a similar situation ris, which could lead to a second wave of inflation in the Eurozone.
What lies ahead in 2025?
When it comes to the rate forecast in 2025, two important elements should be highlighted. The first is the growth of the US economy. It may slow, but it will bring down the base interest rates in the US a little. At the same time, it must be said that the Federal Reserve System (FRS) will not be in a mood to reduce rates aggressively, and they will remain relatively high.
Second, the situation in the Chinese economy and its impact on the prices of raw materials. Recently, the strength of the Chinese economy has weakened: the real estate market is declining, and the economy itself has gone from growth to stagnation. This automatically had a negative impact on raw material prices. However, in the last few weeks, the Chinese government began to stimulate the economy in real terms and promised additional “bazooka” or very large economic stimulus measures.
The currently announced economic stimulus plan is small, about 2% of China’s GDP, but there are rumors of a potentially huge 10 trillion yuan economic stimulus plan. These rumors are fueled by comments from economists at the Chinese Ministry of Finance that now is the right time to implement 4-10 trillion economic heating measures.
The rumors are fueled by the fact that the FRS has started to cut interest rates: As China begins to stimulate the economy, capital would not flow from China to the US as both sides take measures to ease monetary policy. So if China starts massive economic stimulus, we could see a rise in global commodity prices next year, limiting the ECB’s ability to cut interest rates to zero. If China’s economic stimulus fails, the ECB could cut rates further.
We must be prepared that market forecasts for base interest rates at the end of this year and in 2025 will change significantly, and central banks will have to react very quickly to events in the global economy.
The author is the bank Fortress chief economist
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2024-10-21 04:03:00
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