The European Central Bank (ECB) has lowered interest rates by 25 basis points for the fourth time this year to leave the official price of money at a round number: 3% deposit rate. In this way, the cycle of cuts already accumulates a reduction in the price of money of 100 basis points. With all of the above, the main refinancing rate has remained at 3.15% and the emergency window at 3.4%. Today’s decision was a sort of ‘done deal’ that had been made known to the markets by telegraph. The difficult part comes now. In 2025, bets speak of up to five rate cuts that will bring the price of money below 2%, while several members of the Government Council oppose such a drastic reduction in interest rates because they believe that the battle against Inflation has not ended and, furthermore, they prefer to save that ammunition (rate cuts) in case an economic crisis comes in the short and medium term. Follow all the events related to the ECB meeting live here.
Regardless of the decision taken by the ECB, analysts are clear that the key to this meeting lies in the tone that begins to be applied from now on. From Bank of America they highlighted that “the dependence on data and the meeting-by-meeting approach remain, but will be accompanied by a directional orientation towards a return to neutrality and, perhaps, more.” In that sense, the firm believes that inflation forecasts are the key and the ECB will use them to, if the objective is achieved or close to it in 2027, “justify a return to neutrality without previously committing to anything else.” . Therefore, they state that “we see in this a ‘dovish’ approach with modest downward risks for the euro from this meeting.”
In the ‘macro’ projections, the ECB assures that the disinflation process continues to advance. Eurosystem experts estimate that General inflation will average 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027, when the EU’s expanded emissions trading scheme begins to apply. For inflation, excluding energy and food, the forecast is that it will be, on average, 2.9% in 2024, 2.3% in 2025 and 1.9% in both 2026 and 2027, according to the statement.
In the avalanche of macro data that the ECB had on the table, growth data tipped the balance against inflation data. The latest price evolution figures are lower than expected by the ECB, and some of the indicators even reflect inflation at the 2% target. In November, the consumer price index (CPI) overall for the eurozone was 2.3% year-on-year after 2% in October. The most sticky and worrying CPI underlying (excludes energy, food, alcohol and tobacco in this case), it remained at 2.7% for the third consecutive month, when 2.8% was expected.
However, a part of this disinflation is running out, as it reflects the past normalization of supply factors (for example, negative inflation in energy and lower than usual in goods), while the services They continue at high rates (with forecast and signs of cooling, but with the caution that a solid labor market advises), CaixaBank Research explains. The CPI for services is still around 4% after months and months.
The economy cools
In the activitysigns of cooling are more evident in soft and confidence indicators (for example, the PMI -indices of purchasing managers of private sector companies- have steadily fallen to the contractionary zone, below 50) than in the data of higher quality, but of more lagged publication (for example, the GDP accelerated from 0.1% quarter-on-quarter in the fourth quarter of 2023 to 0.4% in the third quarter of 2024). That the leading indicators are pronounced in this way is a confirmation for the ECB that we must strive to save growth.
Taking the above into account, Julius Baer indicates that the ECB has practically no room for maneuver to take another path other than the one given at the meeting. “The ECB is facing a stagnant economy, falling price competitiveness and growing uncertainty. The authorities are taking a dovish tone as a result.” In that sense, the Swiss firm believes that a clear consensus has been forged until reaching this meeting. “The reality is economic stagnation, loss of price competitiveness, increasing foreign competition, restrictive fiscal policies and increased political and trade uncertainty that make a restrictive monetary stance inappropriate.” In that sense, “the authorities seem to recognize these events and this approach.”
Generali experts, for their part, point out the importance of the US tariffs that could arrive in 2025 from Trump in this entire process, in addition to the cascade of political problems that may arise starting in January. “The imminence of US tariffs and the economic fallout from political problems in France and Germany will help balance inflation risks. Although the Governing Council is likely to stick to its data-reliance and meeting-by-meeting approach , the formulation you make will support expectations of gradual interest rate cuts in future meetings.”
Save gunpowder for the future
“ECB hawks now seem to accept the need to cut, but advocate “keeping some powder dry” to deal with future shocks,” and warns Gilles Moëc, chief economist at AXA IM: “We are uncomfortable with the notion of ‘keeping the gunpowder dry’ promoted by ECB hawks, as this sends a signal that the central bank could ‘run out of gunpowder’ in the future, while part of its power lies in the market’s belief in its ability to continually find ways to support the economy and fight the risks of deflation.”
Finally, Moëc adds: “We do not believe that the ECB will have to resort to unconventional policy anytime soon, but given the level of internal and external political instability that the euro zone now faces, the central bank appears as a rare source of peace. It is not the right time to send the signal that some weapons in the arsenal will remain under lock and key.”
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