ECB caution on rate cuts limits growth
The European Central Bank’s cautious monetary policy will be partly responsible for the eurozone’s weak economic growth over the next year or two, UK-based research firm Capital Economics maintains.
The firm forecasts growth in the eurozone at 0.7% in 2024, 1.2% in 2025 and 1.1% in 2026.
A tight fiscal policy will also impact growth. But the ECB’s policy of gradually lowering rates, while keeping them at levels much higher than they were before the Covid-19 pandemic, will mean that private sector borrowing costs will remain relatively high, with spending on interest by both companies and households at a multi-year high. As a consequence, any increase in new loans will be limited.
Despite rates impacting the economy in several other ways (property prices, consumer confidence, exchange rates), the abovementioned two factors are the most important. Slow reference rate cuts means that retail rate cuts will be minuscule, or nonexistent. ECB rate cuts to 2.75% are half a percentage point lower than what the markets expect. In this climate, many corporations and households would rather save than borrow and spend.
