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 trajectory. Recent surveys indicate a remarkable shift in market sentiment concerning expected interest rate cuts by the ECB. Analysts 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 later. This 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 outlook. Political turmoil has swept across Germany and France, shaking the stability of their governments. Ongoing regional conflicts resemble a geopolitical powder keg, ready to unleash a broader crisis at any moment. Additionally, threats from the U.S. government concerning trade tariffs loom like a Damocles sword over investors, further exacerbating their concerns. Amid 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 cuts. Although 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. 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 noted. Practically speaking, it seems more feasible for the ECB to adjust the language used in its official policy statements. Currently, the commitment remains to “maintain sufficiently restrictive rates where necessary,” but analysts expect a shift toward more neutral wording in forthcoming communications. Achieving 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 respondents. A 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 tight. The 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 year. For 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. This requires a high degree of policy balancing skills and effective communication with the market, as even a minor misstep could trigger significant volatility, further destabilizing the Eurozone economy.

Looking ahead, most respondents expect the ECB to downgrade its economic growth forecast for 2025 and to revise down its inflation expectations for this year and the next. Almost two-thirds of those surveyed believe that, on a mid-term basis, the risks associated with inflation falling below the 2% price target are now greater than those of exceeding that target—a notable increase from 55% just two months ago. The rising concerns regarding downward inflation risks in the Eurozone are further magnified by American policies and ongoing geopolitical tensions, both viewed as significant threats to the region’s economic prospects. Marco Wagner from Commerzbank identifies that the greatest challenge for the ECB lies in precisely gauging the varied impacts of U.S. economic policy in the short, medium, and long term.

Despite the daunting landscape, there appears to be a consensus in the market that U.S. tariff policies will suppress economic growth in the Eurozone, although they are expected to have a relatively limited impact on inflation. This scenario positions the ECB in a precarious policy balancing act. Policymakers must ensure that sufficient monetary support is provided to the Eurozone economy to effectively combat recession risks and reduce the likelihood of prolonged subpar inflation; concurrently, they must maintain adequately tight policies in the short term to counter potential new inflationary pressures stemming from retaliatory tariff measures.