In the wake of dwindling economic growth and lackluster inflation, the European Central Bank (ECB) has found itself at the center of market speculation regarding its monetary policy trajectoryRecent surveys indicate a remarkable shift in market sentiment concerning expected interest rate cuts by the ECBAnalysts are now forecasting that the ECB will expedite the pace of rate reductions, potentially lowering the deposit rate by 25 basis points at both the upcoming policy meeting and in June, bringing it down to 2%. This adjustment comes much sooner than the previous expectation, which anticipated reaching that level a year laterThis monetary policy shift reflects the severe challenges faced by the Eurozone, where both the service and manufacturing sectors are experiencing contraction, resulting in significant uncertainty for businesses and consumers alike.

The interplay of various risk factors continues to weigh heavily on the Eurozone's economic outlookPolitical turmoil has swept across Germany and France, shaking the stability of their governmentsOngoing regional conflicts resemble a geopolitical powder keg, ready to unleash a broader crisis at any momentAdditionally, threats from the U.S. government concerning trade tariffs loom like a Damocles sword over investors, further exacerbating their concernsAmid this convoluted landscape, senior economist David Powell opines that the ECB is highly likely to implement a 25 basis point cut during the policy meeting scheduled for December 12. He emphasizes that the policy outlook for 2025 is anticipated to adopt a decidedly dovish tone, as both inflation forecasts and GDP growth expectations have become shrouded in clouds of uncertainty.

Market pessimism has created ripples of speculation about whether the ECB might consider more aggressive rate cutsAlthough some officials have expressed openness to the idea of larger cuts, the majority remain steadfast in their support for a gradual approach to rate reductions

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The consensus among economists is largely aligned with this gradualism, with JPMorgan being the only outlier predicting a 50 basis point cut in December. “While the rationale for policy easing is compelling, the urgency for a 50 basis point cut is not immediately apparent,” one economist notedPractically speaking, it seems more feasible for the ECB to adjust the language used in its official policy statementsCurrently, the commitment remains to “maintain sufficiently restrictive rates where necessary,” but analysts expect a shift toward more neutral wording in forthcoming communicationsAchieving such consensus among ECB officials is essential for transitioning smoothly from a tightening to an easing stance, with an ideal rate level suggested between 1.5% and 2.5%.

As per the survey results, the expectations surrounding the interest rate corridor reveal a significant concentration among respondentsA striking 90% of them set the so-called neutral rate between 2% and 2.5%, and nearly two-thirds forecast that rates will become stimulative by the end of next year, with only 11% believing that policy will continue to be tightThe ECB’s “still stringent monetary policy stance has emerged as a risk factor that cannot be overlooked.” The Eurozone is grappling with multiple structural issues, compounded by political friction in France that exacerbates the situation, pushing the bond yields in the region's second-largest economy to near crisis-era levels, akin to those observed during the European debt crisis of 2012.

Even amid such complexities, only 8% of respondents anticipate that the ECB will activate its “Transmission Protection Instrument” (TPI), designed to mitigate excessive market volatility within the next yearFor ECB President Christine Lagarde, one of the greatest challenges at the upcoming policy meeting will be to clearly signal that the TPI intervention measures will not be deployed while simultaneously avoiding market turbulence

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