Besides the political turmoil, the ECB finds itself in a very difficult environment. Its members are making public hawkish and dovish cases whether to raise interest rates further come December. A handful of central bankers insist their round of rate cuts has ended. Other people are still leaving the door open for even deeper cuts. This major divergence illustrates the policy ambiguity that still exists today among European monetary leaders as they steer through hazy economic waters.
These positive shifts are being overshadowed by recent economic indicators that highlight the challenges still facing the Eurozone. The European Commission’s November Economic Sentiment survey, released yesterday, underscores the painfully slow recovery taking place in the manufacturing sector. As analysts point out, that trend is a sign of something more serious than a passing obstacle. It is indicative of the Eurozone’s growth increasingly veering toward real economic contraction rather than strong, sustained growth.
Many central bankers have suggested that the rate levels now are enough. At the same time, some others continue to make the case for caution, arguing for even more cuts. The argument that the labor market is cooling and that the rate of real wage growth is slowing. Consequently, we expect consumer spending to weaken sharply in the subsequent quarters. This view sheds light on the tightrope the ECB has to walk on, in order to foster robust economic activity and increase control of inflation.
“It is important to remain open-minded on the possible need for a further cut.” – A European central banker
Against this backdrop of concern, other lawmakers have refused to give up hope. They cite factors such as lower energy prices and slightly easier financing conditions for businesses as potential catalysts for growth. They double down on the infrastructure investment needs, including energy transition, automation, digitalization and defense. These above factors would set the stage for a production-led recovery by 2026.
While this optimism is a step in the right direction, the prevailing mood inside the ECB is still one of caution. The contrasting perspectives of the central bankers highlight the confusion and difficulties surrounding the issue. On one hand, some stress the immediate need to keep accommodative policies flowing, but others warn of the danger of overloading policies that might upset financial markets.
As the ECB moves ahead with further evaluations of economic conditions, the discussion of cuts to interest rates will probably continue. Factors outside of US control, such as US import tariffs, make forecasting difficult. Besides the external risks, the internal dynamics inside the Eurozone make this enforcement quite difficult.