ECB's Interest Rate Cut in December Seems Unlikely

As the world’s economy undergoes a transformative phase, the upcoming meeting of the European Central Bank (ECB) on December 12 could unveil significant changes in monetary policy, particularly with a potential rate cut of 25 basis points on the horizonThe whispers among the decision-making council members suggest a consensus towards easing, albeit with a cautious approach towards evaluating the subsequent steps in 2025 and beyond.

The ECB, under the leadership of President Christine Lagarde, appears to be facing a crossroadsWhile the overwhelming belief among committee members indicates a readiness to slash interest rates in December, there is a notable divergence regarding the trajectory for the year 2025. Forecasts stemming from economic research suggest a preferable strategy wherein rate cuts would continue until March of the forthcoming year, culminating in a stabilization at a deposit rate of around 2% — a rate regarded as neutral.

Indeed, the rationale for a rate cut in December is underpinned by the prevailing economic conditions

The anticipated decline in inflation rates signifies that maintaining a tight monetary policy might no longer be justifiedIn fact, experts predict a downward adjustment in inflation forecasts and GDP growth, which indicates that prevailing economic pressures demand a revaluation of policies aimed at stimulating growth.

Moreover, the risk assessment segment from the ECB could also take on a more pessimistic toneAnalysts anticipate that the evaluation will reflect an acknowledgment of declining inflation risks, potentially impacting future monetary decisionsThis could be particularly pertinent as the meeting approaches, in light of the pronounced economic uncertainties that Europe faces, compounded by political concerns particularly in France and Germany.

The discourse during the upcoming press conference is likely to be charged with inquiries surrounding the political turmoil in these critical economies

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While President Lagarde might skillfully sidestep some of these political questions, the implications of domestic political strife are indeed pertinent to ECB’s policy considerations.

Despite the unanimity expressed regarding the December rate cut, the discussion surrounding long-term strategies appears markedly fragmentedFrançois Villeroy de Galhau, the intermediary voice of the ECB and head of the French central bank, openly articulated the conditions that justify a rate reductionThis sentiment is echoed in a broader measure among ECB officials, as indicated by the ECBspeaks index, which remains firmly in the dovish zoneHowever, even among dovish factions, there lies hesitation towards a drastic 50 basis points cut — particularly in light of potential wage contracts anticipated to surge in the third quarter of 2024, leading hawkish officials to push back against such radical shifts in policy.

Looking forward, officials from various camps within the ECB (hawks, centrists, and doves) have publicly aired their views on the neutral interest rate levels and the necessity of rates falling beneath this threshold

Collectively, there seems to be an agreement regarding a drop to around 2%, but opinions vary on whether a deeper cut is warrantedThe prevailing atmosphere reflects a cautious yet coordinated approach to inciting growth while being mindful of inflationary targets.

The undercurrents around inflation expectations serve as a solid justification for the anticipated December rate cutFront-running indicators signal a slowdown in wage growth, combined with a persistent decline in profit margins, suggests that cost pressures may gradually alleviate over timeThis dynamic, intertwined with widening risks surrounding GDP growth—spurred by external tariff threats from the U.S. and internal political upheavals—underscores the precarious positioning of economic activity in the Eurozone.

Indeed, the November Purchasing Managers' Index (PMI) data has illustrated an emerging trend of spiraling risks impacting the broader economic landscape, necessitating the ECB’s intervention

Consequently, as the economic forecasts evolve, there is reasonable speculation that inflation expectations will be downgraded accordingly; predictions suggest a substantial deviation from the previous estimates, leading to a probable adjustment downward—from 2.5% to 2.4% for the overall inflation rate in 2024.

Furthermore, inflation estimates for 2025 could also be recalibrated, with projections now suggesting a rate as low as 1.7%, presenting a stark contrast to prior ECB estimates of 2.2%. Even projections for core inflation may face revisions, as figures are anticipated to shift from 2.9% to a limited 2.8%. The overarching sentiment points toward a recalibration of future growth expectations, with the potential for GDP growth forecasts for 2024, 2025, and 2026 to trend lower than earlier ECB projections.

The shift in mood surrounding risk assessments speaks volumes about the prevailing uncertainties

The previous October evaluation reflected a balanced perspective on upside and downside risks, yet the tone is likely to shift towards a more cautious and pessimistic narrative, especially regarding GDP growthLagarde’s prior remarks underscoring that the downside risks to inflation now outweigh any upside pressures are expected to frame the statements in the impending meeting.

Moreover, the political crises in France and Germany undoubtedly complicate these economic forecastsWith rising borrowing costs in France tied to domestic political dynamics, it is anticipated that President Lagarde might be pressed on this front during the upcoming press conferenceHowever, it is plausible that she could tactfully refrain from drawing any conclusions about the impact of these political events on ECB policy.

In summation, the forthcoming ECB meeting heralds a significant moment for European monetary policy amidst a backdrop of economic fragility coupled with persistent political challenges