European ECB Heads for Last Rate Cut of Year

Introduction

Details of the Last Rate Cut

• Current Rate: The ECB’s key deposit rate currently stands at 3.25%, following three 25-basis-point cuts this year. The possibility of a 50-basis-point cut was discussed, but market expectations and recent comments from ECB officials indicate a smaller, 25-basis-point adjustment is more likely for December.
• Inflation and Growth Considerations: The decision is influenced by a significant slowdown in euro area inflation and a worsening economic outlook, with eurozone inflation dropping to 1.7% in September, below the ECB’s 2% target.

Economic Context

• Growth Projections: Analysts at Bank of America Global Research predict that the ECB will need to “do heavy lifting” in 2025 to bolster the economy, which is expected to grow at or below trend levels. This reflects concerns over political instability in major economies like Germany and France, which are facing higher bond yields.
• Geopolitical Influences: The backdrop includes the uncertain global impact of Donald Trump’s impending presidency, with potential trade tariffs threatening to disrupt European growth further.

Market Expectations and Reactions

• Market Sentiment: Money market pricing suggests little chance of a “jumbo” cut, with expectations leaning towards a more conservative policy adjustment. However, there’s an anticipation of further easing in 2025, with forecasts suggesting the ECB might continue cutting rates until they reach around 1.5% by September next year.
• Bond Yields and Currency: The euro has reacted with slight movements in anticipation of the rate cut, while bond yields in key European economies have been fluctuating, reflecting broader economic anxieties.

Expert Analysis

• Cautious Optimism: Sylvain Broyer from S&P Global Ratings advises caution, suggesting that while inflation is under control in the short term, the ECB should remain cautious due to labor costs increasing above productivity.
• Future Rate Adjustments: Several financial institutions, including Danske Bank, have forecasted that the ECB will discuss a larger cut but opt for a smaller one, with the possibility of more frequent cuts in 2025 to steer monetary policy towards neutrality.

Implications for the Eurozone

• Economic Stimulus: Lower rates could stimulate borrowing and investment, potentially providing a much-needed boost to the eurozone’s economy, which has been lagging behind global peers.
• Inflation Management: The ECB’s actions are part of a delicate balancing act to manage inflation without triggering a resurgence, especially with domestic inflation pressures remaining high due to wage growth.

Conclusion