The European Central Bank (ECB) has cut interest rates by a further 25 basis points to 2.75%, in a further divergence away from the Fed.
While the cut was anticipated, the ECB has sought to address weak eurozone growth with its fifth cut since June of last year.
However, David Zahn, head of European fixed income at Franklin Templeton, expects rates to fall further to 1.5% by the end of 2025.
“Analysts forecast further cuts, potentially bringing the rate to 2% by the end of 2025. The eurozone’s stagnant economy, with a Q4 2024 GDP growth of 0.0%, suggests a need for additional monetary easing. While inflation remains a concern, the economic slowdown is likely to take precedence.
“The upcoming March forecast will be pivotal in confirming the trajectory of increased ECB rate cuts throughout 2025. A more accommodative ECB should be supportive of European bonds, specifically the short end of the market.”
PA event: A World Of Higher Inflation 2025
Central banks diverge
The latest ECB cut follows the Fed’s decision to keep rates at 4.25-4.5% yesterday evening (29 January).
“The ECB’s decision to cut rates by 25bps, while the Fed appears set to hold rates steady for longer, highlights a growing divergence in monetary policy between the regions,” said Morgane Delledonne, head of investment strategy at Global X ETFs.
“While eurozone GDP remains stagnant, economic conditions are deteriorating further in France and Germany.
“Despite acknowledging that inflation has not yet returned to target, the ECB seems more focused on supporting growth, prioritising economic stability over potential inflationary risks.
“In contrast, the US and UK continue to balance persistent inflation concerns with economic resilience, suggesting a different policy outlook. The muted market reaction implies that this divergence is already fully priced in.”
Neil Birrell, CIO of Premier Miton Investors and lead fund manager on the Premier Miton Diversified fund range, said the diverging path of interest rates will be a key consideration for the ECB at future meetings.
“The economy continues to show signs of fragility, evidenced by the Q4 GDP data, with the key French and German economies shrinking at the end of last year, although the outlook for inflation looks to be as positive as could be hoped.
“One of the key considerations for the ECB will be just how far they can diverge from the Fed through the rest of the year. While they will say they will act independently, as they have to, they will have a keen eye on the euro given it is so close to parity with the dollar.”
This article originally appeared in our sister publication, Portfolio Adviser
