The landscape of European economic policy is shifting, as analysts predict the European Central Bank (ECB) may take decisive action by lowering interest rates to 2% by next JuneFollowing a survey by Bloomberg, expectations have adjusted, with most respondents anticipating that the ECB's upcoming meetings will lead to a reduction of 25 basis points each time, rather than the more gradual approach previously suggested.

As inflation and economic growth wane, there is a growing sentiment that the ECB must act swiftly to revive the economyThis sentiment arises from the pressing need to address the cracks emerging within the Eurozone's 20-member economy, particularly as the services sector begins to deflate, trailing behind a manufacturing sector already beleaguered.

The challenges facing the Eurozone are compounded by rising risks associated with political instability, particularly highlighted by upheavals in Germany and France that have rattled investor confidence

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According to David Powell, a senior economist at Bloomberg, there’s a strong likelihood that the ECB will lower rates by 25 basis points at their next meeting scheduled for December 12, while the details surrounding future rate cuts will likely be discussed by President Christine Lagarde in a dovish toneSuch adjustments in communication reflect a recognition of the dimming outlook for both inflation and GDP growth since the ECB's last meeting.

Moreover, speculation has arisen regarding whether the central bank could take a more aggressive step and reduce rates by 50 basis points, rather than adhering to the previously established pace of 25 basis pointsDespite opinions from governors like François Villeroy de Galhau of France and Mário Centeno of Portugal suggesting openness to varied approaches, the consensus remains in favor of a measured process, favoring gradual reductions rather than major shifts.

Economists largely echoed this sentiment, with only a minority anticipating a drastic rate cut in December

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For instance, a team from JPMorgan is the only major player predicting a 50 basis point cut, demonstrating that there is a broad agreement on a more cautious approachBill Diviney from Dutch Bank emphasized the clarity of rationale for easing policy, yet he hesitated on the urgency of implementing a 50 basis point cut at this juncture.

What is more probable is a shift in the official policy statement; the ECB currently maintains that it will uphold a sufficiently restrictive rate "for as long as necessary." A notable majority—53%—of respondents in the recent survey speculate that policymakers will adjust this language as discussions progress, while only a third predict that a more definitive guidance on interest rates will emerge.

Analyst Arne Petimezas from AFS Group believes there will be a gradual transition toward neutral wording in the policy statementHowever, such declarations require broad consensus among officials on the effective level at which rates can be lowered before shifting to a more accommodative stance

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Although differing opinions exist within the ECB, its chief economist, Philip Lane, considers this level to be anywhere between 1.5% to 2.5%.

When questioned about neutral interest rates, responses indicated a fairly tight range, with 90% estimating somewhere between 2% and 2.5%. Roughly two-thirds believe rates will still be stimulative by the end of next year, and only a mere 11% foresee a continued restrictive policy stanceThis evolving dialogue raises critical questions about the path ahead for the ECB’s policy in light of growing market challenges.

There are structural issues that are currently considered risk factors, underscoring the ECB’s tight monetary stance, particularly in light of the mounting political conflicts within the eurozone that are predominantly affecting France, the area’s second-largest economySuch tensions have led to rising bond yields in French ten-year notes, which are approaching levels reminiscent of the 2012 European debt crisis.

Despite the turmoil, a mere 8% of survey takers anticipate the ECB will activate strategies, such as the Transmission Protection Instrument (TPI), aimed at curbing excessive market volatility within the coming year

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Martin Wolburg from Generali stresses that Lagarde’s major challenge next week will be to clarify that any TPI measures are indeed not preventative, thus walking a fine line of market sensitivity.

A significant portion of respondents—nearly two-thirds—now contend that risks are skewed towards inflation remaining below the ECB's 2% target in the medium term, highlighting a shift from previous sentimentsThe perceived threats from U.Spolicies and geopolitical tensions are now considered the foremost challenges to the Eurozone economy.

As Marco Wagner from Deutsche Bank notes, the hurdles for the ECB extend across varying timeframes, with significant uncertainty thickening the air around the specifics of impending U.Spolicy changesThis environment remains treacherous, particularly with tariffs perceived as inevitably hindering economic growth while having a limited impact on inflation, a dynamic that could further complicate the ECB's policy approach.

According to Dennis Shen from Scope Ratings, policymakers must strike a balance in ensuring enough monetary support to counteract recession risks while also maintaining a sufficient tightening stance to address any new inflation pressures stemming from retaliatory tariffs