Weak economic outlook for euro area

Yesterday’s decision by the ECB to cut its deposit rate by a further 25bps to 3.5% came as no surprise to markets. The overnight index swap curve now implies the ECB will cut the deposit rate at least once more in 2024, falling to 3.12% in December and to 1.85% by end-2025. Perhaps more striking were the downward revisions to the ECB’s forecast for GDP growth in 2025. The ECB is now forecasting a 1.3% expansion, down 0.1 percentage points since the last projections in June. The ECB highlighted recent surveys that have pointed to weaker than expected business and consumer confidence and spending. The clear fear here is that the ECB may have already tightened its monetary policy more than sufficiently to curb HICP inflation, but is still overly optimistic in the expectation a consumer led recovery will emerge in 2025.

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Bank of Ireland Economics Weekly 13th September 2024