The European Central Bank is expected to cut key interest rates in the euro zone by 25 basis points for the fourth and final time this year, despite the emergence of inflationary surges in the region. The decision is expected to be taken at the ECB Governing Council meeting in Frankfurt this week. Although inflationary pressures are starting to emerge, the ECB is expected to maintain its accommodative stance given the continued weakness in Eurozone economic growth. Barring any major geopolitical surprises, a group of 12 economists interviewed by Paperjam also forecast that the trend of lower rates will continue during the ECB meetings in January and March 2025.
Eurostat, the EU statistical office, estimated that the euro zone’s annual inflation rate increased to 2.3% in November 2024, from 2.0% in October and 1.7% in September. At the same time, Statec, the statistical office of Luxembourg, a contrasting trend in the country, with consumer prices continuing to fall, with inflation falling to 0.8% in November.
Modest growth expectations
Michael Krautzberger, global head of fixed income investments at Allianz Global Investors, noted that economic growth in the eurozone had continued to disappoint since . He highlighted concerns about future tariff risks arising from the outcome of the US presidential election, which could further complicate growth prospects in 2025. Mr Krautzberger expressed doubts about accelerating the pace of monetary policy in the ECB until future US trade policies are clearer.
François Cabau, senior eurozone economist at Axa Investment Managers, forecast a gradual path for rate cuts, with the deposit rate expected to reach 1.5% by the end of 2025. This forecast is based on expectations of modest growth in the eurozone, with GDP growth of 1.0% in 2025 and 1.3% in 2026. Mr Cabau warned of downside risks, particularly those linked to domestic and external factors, which could affect the pace of rate reductions. He also predicted that inflation would be below the ECB’s 2% target, averaging 1.9% in 2025 and 1.7% in 2026. This scenario would likely lead the ECB to adopt a more accommodating position sooner than expected.
Ruben Segura-Cayuela, head of Europe economic research at Bank of America, said the ECB would likely cut rates by 25 basis points but would avoid deeper cuts. He said the shift in ECB discussions from a 50 basis point cut to more measured language reflected the difficulty of keeping inflation near the 2% target over the medium term. Segura-Cayuela anticipates that future ECB communications will signal a gradual reduction in monetary policy restrictions without committing to a specific rate trajectory.
Kevin Thozet, a member of Carmignac’s investment committee, acknowledged that while markets are pricing in a 25 basis point decline, the likelihood of a 50 basis point decline appears low due to stronger-than-expected growth. in the third quarter of 2024 and a hawkish change in monetary policy from the US Federal Reserve. He suggested the ECB could start to move from a ‘meeting by meeting’ approach to a ‘drive towards neutral rates’ in its forecasts, depending on how the economic landscape evolves.
Doubts remain
David Chappell, senior fixed income fund manager at Columbia Threadneedle Investments, added that while the ECB is expected to remain active over the coming months, a larger than usual rate cut appears unlikely. He noted that the pace of “normalization” could accelerate when U.S. trade policies become clearer in the spring, particularly in light of uncertainties surrounding the impact of the U.S. presidential election on global trade.
Ulrike Kastens, senior economist at DWS, said that despite the deteriorating economic outlook and slightly better-than-expected inflation, she did not foresee an urgency for deeper rate cuts. She stressed that the ECB’s data-driven, meeting-by-meeting approach would likely continue and that growth prospects could be revised downwards. Inflation is expected to move closer to the ECB’s 2% target in the coming years, which could pave the way for further rate cuts until 2025.
Luca Pesarini, chief investment officer at Ethenea, echoed similar views, forecasting a 25 basis point rate cut at the next ECB meeting on Thursday. However, he cast doubt on the possibility of a deeper cut of 50 basis points, citing the current strength of the labor market, with the eurozone unemployment rate at a historic low of 6.3%. and core inflation remaining at 2.7%, which is far from the ECB’s 2% target.
Salman Ahmed, global head of macroeconomics and strategic asset allocation at Fidelity International, also forecasts a round of 25 basis point cuts, pushing the ECB towards neutral territory with a 2% deposit rate. However, he noted that the ECB’s ability to make significant cuts would be limited by concerns over wage growth and services inflation, which continue to persist in the region. He also suggested that the ECB could adopt a more gradual pace of easing into accommodative territory once the neutral rate is reached.
Alexander Bell, fixed income portfolio manager at Indosuez Wealth Management, forecast a rate cut of 25 basis points for each of the ECB meetings in December, January and March, ultimately stopping at a deposit rate of 2% by mid-2025. It forecasts that the euro zone will grow at a mediocre 0.8% in 2025, but will avoid a recession. Mr Bell stressed that inflation would gradually return to the ECB’s 2% target, although services inflation remains a major risk.
Paul Jackson, global head of asset allocation research at Invesco, noted that the eurozone economy had lost momentum in the second half of 2024, with inflation now between 2 and 3%. Mr Jackson estimated that the ECB would likely implement a 25 basis point cut in December, but could pause its easing cycle in January before resuming it in March, depending on economic data.
Andrzej Szczepaniak, senior European economist at Nomura, estimated that while data for October and November 2024 had been volatile, the general trend supported a rate cut of 25 basis points. He stressed that despite weak purchasing managers’ indices, higher-than-expected official data indicated the ECB would not rush to implement deep cuts. Mr Szczepaniak also noted that growing concerns over US tariffs and slowing inflation in services supported a more cautious approach from the ECB.
Axel Botte, head of markets strategy at Ostrum Asset Management, predicted that the ECB would gradually cut rates to 2.25% by mid-2025. However, he suggested that inflation risks, particularly in relation to services inflation, would prevent the ECB from cutting rates significantly below 2%. Botte stressed that the ECB should also monitor US trade policies, which could influence its decisions, particularly if new tariffs are imposed.
The ECB Governing Council will meet on Thursday December 12 to decide on key interest rates for the euro zone.
This article was originally written in English, translated and edited for the Paperjam website in French.
