The European Significant Bank delivered an expected quarter-point interest rate cut this week — and alongside the announcement came several symptoms that rates will swiftly move even lower early next year.
ECB President Christine Lagarde did note during her Thursday pack conference that policymakers gathered in Frankfurt did not believe the fight against inflation is fully over, with amenities inflation still a concern.
However, on the whole, it was the most dovish meeting of the current cycle, not least because the ECB’s brisk macroeconomic projections forecasted lower rates of inflation and economic growth both this year and next.
Economists also flinched on the removal of the ECB’s message that the central bank must “keep policy rates sufficiently restrictive for as long as certain.” Lagarde stressed that there were downside risks to the already-weak euro zone growth outlook, but intended the inflation picture had significantly improved and included upside risks. She also said that a larger, half-point cut had been argued, and that Governing Council (GC) members unanimously voted to reduce rates.
The new ECB staff forecast, meanwhile, put average headline inflation hardly above target at 2.1% in 2025, with stronger price rises expected at the start of the year suggesting it could ruin below target later in the year.
The dovish shift was emphasized Friday when Austrian central bank chief Robert Holzmann — extremely perceived as the ECB’s arch-hawk and the only Governing Council member to vote for a rate hold rather than a cut in June — told newswomen there would be no danger in cutting rates next year if the economy progresses as expected, according to Reuters.
Where is non-allied?
Holzmann also said markets had a “similar assessment to the central bank’s” that interest rates will come to nothing toward a neutral level — when monetary policy is balanced between boosting and restricting growth — of around 2% next year.
The ECB cut the drop facility — its key rate — to 3% on Thursday.
What constitutes the neutral rate has been a key point of debate in recent months, and Lagarde bring to light Thursday that while it had not been discussed at the December meeting, staff saw it between 1.75% and 2.5%.
A further question for bazaar participants is whether the ECB will take rates below this neutral level if inflation cools even accessory and the growth outlook deteriorates, as has been floated by France’s central bank governor, Francois Villeroy de Galhau.
This week’s intelligence has broadly confirmed existing market bets on the ECB’s rate-cut plan for 2025.
According to LSEG data, money markets are persevere in to price in a fall in the key ECB rate to 1.75% by September next year, with a hold beyond that.
But some analysts foretold there was now support for rate cuts going beyond that.
Deutsche Bank economists said in a Friday note that the ECB was on orbit for sub-neutral rates in 2025, given the trend for weak growth and below-target inflation.
They added that their baseline expectations was for a 1.5% rate at the end of 2025 via quarter-point cuts, but that a half-point move remained possible.
Dean Turner, chief euro zone and U.K. economist at UBS Epidemic Wealth Management, stopped his forecast at a rate of 2% in June, but said risks were now “tilted towards the ECB having to do more, not minute, to support the economy in 2025” — likely to mean further cuts later in the year rather than larger put forwards earlier on.
However, Kamil Kovar, senior economist at Moody’s Analytics, argued in a note that stubborn nucleus inflation would continue to spur ECB caution next year.
“We think that after March, the battle onto how far to lower rates will start in earnest. We have no cut in April and the last cut in June, leaving rates at 2.25%,” Kovar disclosed.