Doha: Qatar National Bank (QNB) expects the challenging monetary conditions and stagnant economic activity to prompt the European Central Bank (ECB) to reduce interest rates by 150 basis points by mid-2025, lowering the benchmark deposit rate to 1.75 percent. In mid-2022, a surge in inflation led the ECB to initiate its most aggressive monetary tightening cycle, resulting in a record sequence of ten consecutive rate hikes, pushing the benchmark deposit rate to 4 percent, its peak historical level.

According to Qatar News Agency, these measures, alongside the normalization of supply chains, succeeded in curbing inflation, reducing it from a peak of 10.6 percent to below the ECB’s 2 percent target. With inflation under control, the ECB began reducing interest rates in June, bringing the benchmark deposit rate to 3.25 percent. Moving forward, the ECB is tasked with carefully adjusting interest rates, as the risks now lean more towards economic stagnation than inflation. Recent economic indicators have underperf
ormed against forecasts, signaling a need for cautious monetary policy adjustments.

QNB highlights three main factors supporting this view. Firstly, there is a growing risk of inflation dropping significantly below the ECB’s target, raising concerns about a potential deflation spiral. Deflation could lead to reduced spending and investment, creating a negative economic feedback loop. Recent data showed headline inflation at 1.7 percent, indicating a downward trend that could push it further below the target. Such risks necessitate a more rapid reduction of policy rates by the ECB.

Secondly, financial conditions remain restrictive due to elevated interest rates and the central bank’s balance sheet retrenchment. The current deposit facility rate of 3.25 percent still suggests a restrictive level for the real interest rate. Moreover, overall financial conditions, although eased from their peak restrictive levels, remain comparable to those during previous economic crises. The ECB’s ongoing balance sheet normal
ization limits credit availability, impacting credit volumes and signaling excessively restrictive monetary conditions.

Lastly, the Euro Area’s economic growth has been lackluster, with the region teetering on the brink of recession. The Purchasing Managers Index (PMI) indicates a stagnant economic outlook, with the composite PMI hovering around the 50-point threshold signaling contraction or expansion. Despite resilient labor markets, job creation is softening, and real GDP growth in 2024 and 2025 is projected to fall below the long-term average of 1.4 percent. These factors support the case for faster interest rate cuts by the ECB.

Source: Qatar News Agency