In 2024, monetary policies on both sides of the Atlantic will finally have had similar trajectories. Indeed, by carrying out its third rate cut for this year this week, the American Federal Reserve (Fed) finally lowered its rates at the same pace as the European Central Bank (ECB). Even though the Fed was more aggressive at the start of its rate cut cycle, with an initial cut of 50 basis points last September, the two central banks both lowered their rates by 100 basis points. over the whole of 2024.
On one side of the Atlantic…
The recent decrease in interest rates is mainly due to falling inflation in the United States and the Eurozone. Growth and inflation projections, recently updated by the two central banks, however, signal change for 2025. In particular, the Fed could adjust its rates at a different pace from that of the ECB.
Growth and inflation projections, presented this week by the Fed, show a slight improvement in growth forecast in 2025, but also inflation higher than September estimates (core PCE inflation rate of 2.5% compared to 2 .2% previously). These adjustments in economic forecasts have led several members of the Fed to review their expectations regarding future movements in interest rates. The projections of the members of the Monetary Policy Committee, included in the “dot plot”, now indicate that only two rate cuts, of 25 basis points each, are expected for 2025, compared to four previously. This change in position by the Fed, which is less accommodating, generated a strong reaction on the financial markets. Following these announcements, stock markets ended lower and bond yields increased. Although the Fed's less accommodative monetary policy stance is primarily due to revised inflation forecasts, uncertainty around the new Trump administration's economic policy may also have influenced this change.
…and on the other
In the euro zone, the ECB is expected to maintain its monetary easing at the current pace. According to the ECB's updated macroeconomic projections, average annual inflation is expected to reach the target of 2.1% in 2025, while GDP growth is expected to increase from 0.7% in 2024 to 1.1% in 2025. Although the ECB remains cautious regarding inflation, particularly in services, growth and inflation forecasts support its actions.
In 2025, the speed of rate reduction could therefore be very different between the Fed and the ECB, with a more cautious Fed and an ECB continuing its easing at the current pace. However, it is important to note that although the ECB is expected to continue its action at the current pace, it is closely monitoring the possible consequences of the economic policies of the new president-elect, Donald Trump. In addition, the ECB will carefully examine the effects of the rate differential resulting from these different monetary policy approaches. In this context, it is not surprising that Ms. Christine Lagarde, President of the ECB, recalled that the institution will continue to adopt a progressive approach and will remain attentive to the evolution of economic data.
