Goldman Sachs points out what the European Central Bank (ECB) does not want and cannot admit. This American investment bank—one of the ‘strong hands’ of the financial markets—projects a fourth cut in the official ‘price’ of money in the eurozone of 0.25 points on December 12, to 3%, and five more drops over the next year until leaving them at 1.75% in July.
Economic activity in the region needs oxygen, especially given the stagnation in Germany. This is evidence for the Goldman Sachs analyst team, despite the fact that the ECB continues to twist the rhetoric that its Governing Council will analyze the data “meeting by meeting” before continuing the easing of financing conditions that began in June of this year.
The investment bank’s experts emphasize that “the weak growth” of the eurozone as a whole and the moderation of inflation increase the pressure on the ECB’s interest rate cuts in the coming months.
Goldman Sachs’ GDP (Gross Domestic Product) growth forecasts are more pessimistic than those released by the institution’s own economists in September. The bank projects an advance of 0.8% on average in 2025 for euro partners compared to 1.3% for the ECB, which will update these estimates precisely in December.
Goldman analysts also see lower inflation than the central bank chaired by Christine Lagarde, 2% on average in 2025 in the eurozone, compared to the 2.2% expected by the ECB.
With these forecasts, Goldman Sachs is confident of an interest rate cut in December, which will be followed by another five consecutive ones. Instead, the minutes of the ECB’s Governing Council meeting in October, which were published this Thursday, once again state that the institution will continue to “apply a data-driven, meeting-by-meeting approach to determine the level and the appropriate duration of the restriction. “There should be no prior commitment to a particular rate path in order to have the freedom to respond as necessary.”
“Given our forecasts for lower growth and inflation, we expect the Governing Council to place rates slightly below the neutral level, with cuts of 25 basis points at each meeting, up to 1.75% in July,” they point out at Goldman Sachs. . “Although it is possible to return to quarterly cuts if the economy turns out to be more resilient than expected, we see the risks skewed towards faster and deeper cuts,” they add.
The ECB has run out of arguments about wage increases
One of the keys for the investment bank is that “the weakening of the labor market supports our view of cooling wage growth.” Salary increases have been one of the arguments most used by the ECB to justify an aggressive position.
It must be taken into account that central banks assume the damage to the real economy (to families, to companies…) as part of their strategy to fight inflation. Monetary austerity is effectively a way of suffocating household demand and companies’ ability to invest by making mortgages and loans in general more expensive.
In fact, Spain, which is a positive exception in the eurozone and whose GDP is expected to grow by 3% in 2024 and another 2% in 2025, has also received a hard blow from the latest cycle of monetary austerity.
Last week, a report from the Bank of Spain indicated that the ECB’s interest rate increases from 2022 – from -0.5% to 4% where it left them in autumn 2023, until it began to lower them in June of this 2024—have subtracted 2.5 points from the advance of our country’s GDP in the last three years, and will still continue to hit the advance of the GDP (Gross Domestic Producer) in 2025. The Bank of Spain calculates that the damage of austerity monetary contribution to the real economy will reach close to 40 billion euros in total from 2022 to 2025.
Meanwhile, the institution led by José Luis Escrivá points out that the “tightening” of financing conditions has barely reduced the average inflation each year by a few tenths, but celebrates that it has been “fundamental in anchoring expectations” regarding price increases.
Currently, one of the threats to monetary policy is the return of Donald Trump to the presidency of the United States, as explained in this information. The main reason is that many of his promises—such as those related to tax cuts—and the risk of triggering a war are “inflationary” factors, as most experts agree.
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