The European Central Bank is set to cut interest rates for the final time this year on Thursday – although the institution is expected to stick with a quarter percentage point rather than half a percentage point, economists predict the pace of monetary easing will accelerate in the future.
This remains an important meeting for setting guidance for the year ahead, not least because ECB staff will publish quarterly macroeconomic forecasts on growth and inflation. The forecasts will take into account the highly uncertain global impact of Donald Trump’s return to the White House and his threat to impose sweeping trade tariffs.
Since the beginning of this year, the Eurozone Central Bank has lowered its key interest rate from 4% to 3.25%, and raised it by 25 basis points three times between June and October.
The possibility that the European Central Bank may choose to cut interest rates by 50 basis points to end 2024 seems certain after its latest autumn meeting, with multiple policymakers telling CNBC they will continue to rely on data but that the euro zone’s economy is growing significantly faster Slowing inflation and a deteriorating economic outlook for the euro zone may require major steps in December.
Money market pricing currently suggests a significant cut is unlikely. As of Wednesday morning, December’s rate cut had been priced in at about 29 basis points, and economists said November’s cut had already been priced in. Negotiated salary growth accelerates Caution is required.
Headline inflation returned above target in November, climbing to 2.3% from 2% in October. Meanwhile, the Eurozone’s economy grew at its fastest pace in two years in the third quarter, albeit by only 0.4%.
“There is no need to rush the ECB at this stage,” Sylvain Broyer, chief Europe, Middle East and Africa economist at S&P Global Ratings, told CNBC’s “Squawk Box Europe” on Monday.
“Inflation is under control, at least in the short term. But as long as labor costs are growing faster than productivity, the ECB should remain cautious or wait-and-see about cutting interest rates.”
Broyer said that could mean a 25 basis point rate cut in December, followed by “quick” rate cuts, taking monetary policy to a neutral stance that neither limits nor stimulates economic growth.
“weightlifting”
Some forecasts believe that this pace means the ECB will cut interest rates by 25 basis points at all six meetings through September in 2025, reducing its key interest rate (deposit instrument) from 3% to 1.5%.
That includes researchers at Denmark’s Danske Bank, who said in a note on Tuesday that ECB policymakers will discuss a 50 basis point rate cut at their December meeting, but will ultimately take a smaller step.
They added that they expected a “benign market reaction” even if ECB President Christine Lagarde shifts her message in a more dovish direction.
Bank of America Global Research updated its forecast on Tuesday to lower the deposit facility rate to 2% by June next year to 1.5% in September.
“With economic growth set to be at or below trend for most of 2025, we think it will be difficult for the ECB to skip the meeting until the (deposit facility) is just below the neutral rate (2%), to the level we are seeing ( 1.5%),” said Bank of America strategists, ReferencerTalking about the middle ground on monetary policy.
The geopolitical backdrop is a key reason for the more modest outlook for 2025.
The European Central Bank is preparing to “lift weight” in the new year to support declining euro zone economic growth, while political instability in major countries Carsten Brzeski, global head of macro at ING Research, said at an event last week sharing the 2025 outlook that the German and French economies had pushed up bond yields in these key regions.
Brzeski said that under Trump, the United States will eat into the flow of funds into key areas through tax cuts, deregulation and attracting European investment, noting that this may be more damaging to the euro zone economy than tariffs. However, macro forecasters including Brzeski generally believe that there is a high degree of uncertainty about the policies that Trump will actually implement.
“Southern European economies will continue to benefit from the post-epidemic tourism boom, and they do not need to compete with Chinese manufacturing. But politics in Germany and France will also come to a standstill in the first half of this year.” said.
Brzeski continued that potential upside surprises in the euro area could have a delayed impact on near-term real income and savings growth, providing strong support for the economy in 2025. Instead, his “bold call” expected Europe to introduce protectionist measures of its own as a rebuttal to Trump’s terms, “plunging global goods trade into a full-blown trade war”.
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