Analysts believe the European Central Bank (ECB) could lower interest rates more quickly than previously anticipated.

While forecasts earlier this summer predicted the six-month Euribor would end the year around 3 percent, the rate stood at 2.695 percent on Friday. This marks a significant drop from its peak of 4.143 percent in October last year, which was the highest in recent years.

According to analysts, expectations for interest rates have declined due to the weakening eurozone economy and challenges faced by the manufacturing sector in countries like Germany and France.

LHV macroanalyst Triinu Tapver highlighted that the eurozone's economic growth forecast for next year has been revised downward to 0.8 percent. "Decreased demand, persistently high input prices and wage pressures have reduced business confidence, resulting in larger layoffs," she explained.

Luminor's chief economist, Lenno Uusküla, noted that as early as spring, the bank forecasted the six-month Euribor would drop below 2.8 percent by the end of the year, primarily due to skepticism about strong economic growth in the eurozone, particularly in Germany. Uusküla added that the arrival of Chinese electric cars on the European market was only a matter of time, creating challenges for Germany's automotive industry.

Beyond the business sector, concerns about high levels of public debt are growing. If interest rates remain elevated, they could exacerbate budgetary issues, weaken financial markets and further strain the economy, Tapver warned.

"Although the eurozone's average public debt ratio stood at 88.1 percent of GDP in the second quarter, key countries like Italy and France have debt levels reaching 137 percent and 112.2 percent, respectively. For these countries, refinancing loans taken out in a low-interest environment will become more expensive in the coming years," Tapver said.

Uusküla remarked that the ECB now recognizes the seriousness of Europe's economic challenges. He pointed out that recent economic growth was largely driven by government support measures. Policies that suppressed economic activity led governments to increase fiscal support, pushing budget deficits beyond agreed limits. "Currently, eight countries with excessive deficits are under investigation by the European Commission," Uusküla said.

The combination of slowing growth, high inflation and rising debt levels has left the eurozone facing significant economic uncertainty, with the path forward largely dependent on central bank actions and broader economic policy adjustments.

Rates could drop faster than anticipated

In October, the European Central Bank's (ECB) Governing Council lowered its key interest rates by 0.25 percentage points. The deposit facility rate now stands at 3.25 percent, the main refinancing operations rate at 3.40 percent and the marginal lending facility rate at 3.65 percent.

The ECB is set to make its next decision in mid-December.

"This has increased expectations for faster rate cuts by the ECB, which could stimulate the economy and reduce borrowing costs for both public debt and businesses," said Triinu Tapver. She added that it is also possible the central bank may implement a larger rate cut of 0.5 percentage points in December.

Lenno Uusküla noted that money markets are expecting a 0.25 percentage point rate cut in December, with further reductions likely to continue into next year.

"Over the next six months, the deposit rate is expected to drop by at least one percentage point, meaning a minimum 0.25 percentage point cut at every meeting. By early summer, the deposit rate could reach 2.25 percent," Uusküla explained.

Six-month Euribor rate could drop below 2 percent

According to Uusküla, the downward trend in the six-month Euribor is clear, but the exact timing and level of its decline will depend on various factors.

"A 2 percent interest rate is likely to hold if inflation stabilizes around the same level," he said, adding that rates could fall even further since there are still reasons to expect low inflation.

Swedbank senior economist Liis Elmik suggested that by the end of next year, the six-month Euribor could drop below 2 percent. "Euribor is decreasing because inflation in the eurozone has slowed, and the European Central Bank continues to lower interest rates," she said.

Triinu Tapver noted that the ECB is expected to continue cutting rates next year, with financial markets projecting that the six-month Euribor could fall to 1.75 percent by the end of 2025.

Uusküla also highlighted potential risks, such as the lingering effects of trade wars initiated by Donald Trump, which could drive up import prices and accelerate inflation. Additionally, he pointed out that inflation could be more significantly influenced than expected by climate change, particularly through fluctuations in agricultural yields and the costs associated with the green transition.

In Estonia, approximately three-quarters of households have loans tied to the Euribor, and the rate's decline has reduced monthly mortgage payments. "Since the peak in December 2023, most Swedbank clients have seen their loan repayments decrease by up to €50 per month," added Elmik.

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