The European Central Bank is set to make its final interest rate cut for the year on Thursday – and while the institution is expected to commit to a cut of a quarter rather than half a percentage point, economists expect a faster pace of monetary easing ahead.
This meeting will remain crucial for setting guidance for next year, not least because ECB staff will issue their quarterly macroeconomic forecasts on growth and inflation. These forecasts will take into account the highly uncertain global impact of Donald Trump's return to the White House and his threats Comprehensive trade tariffs.
The European Central Bank has so far reduced its key interest rate from 4% to 3.25% this year through three increases of 25 basis points between… June and October.
The possibility of the ECB opting for a 50 basis point cut to conclude 2024 appeared strong after its recent autumn meeting, with… Many policy makers They told CNBC they would remain data-reliant, but a significant slowdown in inflation in the euro zone and the bloc's deteriorating economic outlook could warrant a big move in December.
Money market pricing now suggests there is little chance of a significant trimming. As of Wednesday morning, cuts were priced in at around 29 basis points for December, and economists say November cuts Increase in negotiated wage growth It will call for caution.
headline inflation It rose again above the target In November, it rose to 2.3% from 2% in October. Eurozone economy in the meantime It grew at its fastest pace in two years In the third quarter, albeit at a rate of only 0.4%.
“There is no need to accelerate at this point for the ECB,” Sylvain Breuer, chief economist for EMEA at S&P Global Ratings, told CNBC on Monday.
“Inflation, at least in the short term, is under control. But as long as labor costs outpace productivity, the ECB should remain on the dovish side, or wait-and-see side of interest rate cuts.”
This is likely to translate into a 25 basis point cut in December, followed by interest rate cuts “at a rapid pace” to move monetary policy to a neutral stance that neither constrains nor stimulates growth, Brewer said.
“weight lifting”
Many forecasts see this pace meaning cuts of 25 basis points at all six ECB meetings in 2025 until September, raising the key interest rate – the deposit facility – from 3% to 1.5% as a result.
That includes researchers at Danish bank Danske, who said in a note on Tuesday that ECB policymakers would discuss a 50 basis point cut at their December meeting, but would ultimately settle on a smaller move.
They added that they expect a “benign reaction from the market,” even if European Central Bank President Christine Lagarde shifts her messaging in a more pessimistic direction.
Bank of America Global Research on Tuesday updated its forecast from the pace of interest rate cuts that would take deposit facilities to 2% by June next year, to a clip that takes the rate to 1.5% by September.
“With the economy growing at or below trend for most of 2025, we think it will be difficult for the ECB to skip a meeting until (deposit facilities) fall slightly below where it sees the neutral rate (2%).” To where we see it (1.5%),” said strategists at Bank of America, RefpA link to that middle ground of monetary policy.
The geopolitical backdrop is a major reason for this more pessimistic outlook for 2025.
The ECB is preparing for a year of 'heavy lifting' to support waning growth in the euro zone, while political instability in leading countries… German and French Economies are sending bond yields in these key regions higher, Carsten Brzeski, global head of macro at ING Research, said at an event sharing his 2025 forecasts last week.
Brzeski said that under Trump, the United States is preparing to dismantle the flow of money to vital sectors by cutting taxes, liberalizing restrictions and attracting investment from Europe, noting that this may be more harmful to the euro zone economy than tariffs. But macro forecasts, including Brzeski's, broadly indicate a great deal of uncertainty about the policies Trump might actually implement.
“Southern European economies will continue to benefit from the post-pandemic tourism boom, and will not need to compete with Chinese manufacturing. But the first half of the year will also be politically deadlocked in Germany and France,” Brzeski said. He said.
Brzeski continued that a potential bullish surprise for the eurozone could trigger a lagging effect from recent growth in real income and savings, providing strong support for the economy across 2025. Conversely, his “bold call” on the downside envisions Europe moving towards protectionist measures. Its own response to Trump's rulings, “plunging global commodity trade into an all-out trade war.”
