AXA IM: ECB will hit 1.5% by the end of this year

AXA IM: ECB will hit 1.5% by the end of this year

January 27, 2025

Interest Rates ECB
Rente (04) inflatie

Gilles Moëc, AXA Group Chief Economist and Head of AXA IM Research, comments on the upcoming ECB decision:

Even if it is not for immediate consumption and we do not expect any major change of tone from the ECB this Thursday, we continue to think – unlike the market which has revised up lately its expected trajectory for European monetary policy – that the central bank will move its rates squarely into accommodative territory, hitting 1.5% by the end of this year (the market’s baseline is at 2%).

Maybe the elections in Germany will provide the “jolt” the EU needs right now, at the national level, to get the machine working again. We think it will take time, unfortunately, if only because a full political clarification does not seem imminent in France. In the meantime, it is the ECB which, as often, will have to offer a “bridge” to the European economy, as the only institution with ample political and technical capacity for action.

In the short run, it should not be very difficult for the European Central Bank (ECB) to provide Europe with some rays of light, removing restriction at every meeting. We expect another 25-bps cut this week with the promise of more ahead. A slightly higher momentum for core inflation in December – driven by services prices – combined with a better-than-expected print for the Purchasing Managers’ Index (PMI) in January probably brings to zero the probability the ECB would announce an acceleration of this pace this week (in clear, opening the door to 50-bps cuts). Yet, we find it sadly reflexive of the current level of gloom in Europe that a pitiful 50.2 level for the composite PMI is treated with such fanfare.

This Thursday, there is little doubt Christine Lagarde will face a wall of questions on how Trump 2.0 is affecting her thinking. We have equally little doubt that she will deflect by stating that the Governing Council needs to see actual decisions, not vague threats, to calibrate a response. But in Davos, she recognized Europe is facing an “existential crisis”. This should be a strong enough reason for the ECB to focus on the downside risks to growth, rather than on any residual upside risks to inflation, in its decision-making.

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