The European Central Bank is expected to cut key rates again on Thursday, but the extent of the reduction is debated as the economy slows and political turmoil in France and Germany raises concerns.
With inflation approaching what the ECB wants, 2%, and growth not taking off, “all the reasons” argue for a further rate cut in December, declared the governor of the Bank of France François Villeroy from Galhau.
He was joined by other monetary officials in the euro zone. The decision will be announced at midday following a meeting of the governing body of the monetary institution in Frankfurt.
Despite a slight increase to 2.3% year-on-year in November, inflation in the euro zone remains well below the forecast of 2.6% for the fourth quarter established by the ECB.
The most likely scenario is that of a rate cut of 0.25 percentage points, like the previous ones, bringing the deposit rate, which refers, to 3%.
But a drop of 0.5 points could be considered if the new economic projections of the monetary institution, which are published Thursday, show “a sharp deterioration in growth and a rapid drop in inflation”, estimates Eric Dor, director economic studies at IESEG.
If it materializes, the fourth rate cut by the ECB since June will amplify the turning point taken after a period of monetary tightening in the face of high inflation, linked to the war in Ukraine and the post-Covid recovery.
Political crises
Political turmoil sweeping through two main euro zone economies, Germany and France, is also likely to dampen growth.
While waiting for a successor to the post of Prime Minister after the fall of the Barnier government, France, economically weakened, is currently without a budget for 2025, with a public deficit skidding this year to 6.2% of GDP.
German Finance Minister Jörg Kukies, however, was reassuring, emphasizing the “very calm” reaction of the markets.
If France’s borrowing conditions deteriorated too much, the ECB could act symbolically via its Transmission Protection Instrument, through debt buybacks on the market, to prevent any contagion to other countries.
Germany is also in the midst of a period of uncertainty. In addition to the industrial crisis it is going through, it is heading towards early elections in February, after the collapse of the coalition of Social Democratic Chancellor Olaf Scholz in October.
A delay in the formation of the future government in Berlin would further complicate the recovery of Europe’s largest economy, weakened by an industrial slowdown which has lasted for two years and which is already affecting its partners.
The imminent return of Donald Trump to the White House is also worrying, with the implementation of a protectionist policy which could slow down exports and therefore the growth of the euro zone.
New communications
In the United States, inflation accelerated in November, to 2.7% at an annual rate, fueling fears that the curve would remain on this trajectory. Enough to complicate the task of the American Central Bank (Fed) which meets next week.
ECB President Christine Lagarde is expected to explain on Thursday “that recent data reinforce confidence in the fact that inflation will move towards the 2% target in a sustainable manner”, expects Holger Schmieding, economist at Berenberg.
High uncertainty has led the ECB for months to set its course based on data and meeting by meeting.
However, with the normalization of inflation, its communication could become more “prospective” again, according to the governor of the Bank of France.
Which means that instead of saying rates will remain “restrictive for as long as necessary” to bring inflation back to target, looser wording in today’s policy statement would “open the way for further cuts” ‘next year’, according to HSBC.
This article was automatically published. Sources: ats / awp / afp
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