Europe | 2025, a challenging year for central banks

Summary

2024 has been less challenging for central banks as the disinflation process consolidates, building confidence in achieving the 2% inflation target. In 2025, the challenges will be greater and the debates more intense.

Key points

• Key points:
• In the eurozone, inflation will stand at an average of 2.4% this year (compared to 5.4% and 8.4% in 2023 and 2022, respectively) and, according to recent forecasts by the European Central Bank (ECB), it is expected to stabilize at around 2% in the coming years.
• With the (downward) direction of rates clear, the debate in the ECB Governing Council has focused on the optimal timing to initiate the rate-cutting cycle and the appropriate pace for implementing these rate cuts.
• Although the minutes of the internal discussions reveal a diversity of opinions, there was broad consensus to implement a total of 100 basis points in rate cuts between June and December, in a well-justified cautious amount (25 basis points at a time) given service sector inflation, which remains stagnant at around 4%.
• In 2025, one of the challenges will be how far to lower rates, which is directly related to the vision of the "neutral rate". Lagarde suggested a range of 1.75%-2%, while more optimistic ECB members proposed a higher range of 2%-3%, and neutral members suggested a middle ground of 2%-2.50%. Another key topic will be the revision of the monetary policy strategy, where conflicting viewpoints are also expected to emerge.
• These discussions will take place in an uncertain geopolitical and macroeconomic environment, particularly in relation to tariff threats or the political situation in some countries of the euro area.

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