European policymakers will set interest rates in Frankfurt this week for the first time since governments in Paris and Berlin collapsed over budget talks. The ongoing turmoil has obscured their view of the two biggest economies in the currency region they manage, casting doubt on quarterly forecasts.
The European Central Bank (ECB) is likely to deliver a fourth quarter-point rate cut this week, as officials focus on spurring lackluster growth. However, political uncertainty is a major concern, with economists warning that fiscal policy developments in France and Germany could affect consumers and businesses.
French President Emmanuel Macron’s new budget proposal has been rejected by parliament, while Germany faces new elections in February following the breakdown of Olaf Scholz’s three-party coalition. This has created uncertainty around Germany’s economic outlook, with economists predicting a prolonged period of weakness.
The ECB is struggling to navigate this uncertain environment, and its rate path remains difficult to predict. Economists currently see quarter-point cuts at every meeting through June, but investors speculate about a bigger move in the coming months. The bank’s best option might be to put more emphasis on plausible outcomes instead of relying on a likely base case.
Central bankers will have to think in scenarios to address the many moving parts, waiting for more data before gauging the impact of political turmoil on companies and households. In Germany, business expectations remained subdued last month after the government broke apart, with solutions under discussion including a loosening of the constitutional borrowing limit.
Source: https://finance.yahoo.com/news/turmoil-paris-berlin-overshadows-ecb-070000955.html