The possibility of a half-point interest rate cut by the European Central Bank (ECB) continues to loom large despite the institution’s preference for more gradual, quarter-point reductions, Bloomberg reports.
Investors and analysts are increasingly considering the chance of a larger rate cut in the coming months as inflation expectations fall below 2% and economic activity in the eurozone shows signs of strain.
While most market watchers still expect smaller, incremental cuts, traders remain attuned to the potential for a bolder move at one of the ECB’s next three policy meetings. The upcoming meeting on December 11-12 has drawn particular attention, with discussions on the possibility of a larger cut reportedly on the agenda.
Two key factors are driving the possibility of a half-point cut. First, inflation expectations are easing. A closely watched market measure of inflation forecasts has dipped below the ECB’s 2% target. This development has fueled calls for more aggressive action to support growth and ensure inflation does not slip too far below target.
Second, the eurozone economy continues to show signs of fragility. Surveys of purchasing managers point to weaker business activity, and political instability in Germany and France is adding to the region’s economic uncertainty. These factors have prompted policymakers, such as France’s central bank governor, François Villeroy de Galhau, to call for “full optionality” on the size of rate cuts.
Governing Council member Martins Kazaks also confirmed that a 50 basis-point cut will be “definitely discussed” at the December meeting, though he acknowledged that uncertainty remains high.
Proponents of a 50 basis-point rate reduction argue that Europe’s sluggish economic growth demands stronger intervention. JPMorgan Chase & Co. is one of the few major institutions calling for a half-point cut as early as December, citing a combination of moderating inflation in services, fragile economic conditions, and the potential impact of global trade uncertainty.
“Growth would argue for a 50 basis-point move,” said Jordan Rochester,head of macro strategy at Mizuho.
He noted, however, that the ECB’s cautious approach to past inflation could still result in the bank opting for a quarter-point cut instead.
A larger rate cut could also serve as a signal to markets that the ECB is serious about reviving economic growth and restoring confidence in the region’s financial system. The potential for deeper cuts could incentivize consumer spending and business investment, boosting overall demand.
Despite the market speculation, there are several reasons why the ECB might avoid a half-point reduction. First, a drastic rate cut could send a negative signal to financial markets, suggesting that the ECB sees the economy as being in worse shape than previously thought. This could increase volatility in financial markets and fuel concerns about future economic weakness.
Second, a sharper cut could put downward pressure on the euro, which has already lost around 3% of its value since Donald Trump’s return to the White House. A weaker euro would raise the cost of imports, potentially reigniting inflation in an already delicate economic environment.
Third, economists from Nordea, including Tuuli Koivu, warn that a large cut could push rates below the so-called “neutral” level—where interest rates neither stimulate nor restrict the economy. If rates fall below 1.5%, it could signal a deeper shift toward ultra-loose monetary policy, potentially distorting financial markets and reducing the ECB’s ability to adjust rates in the future.
Even the ECB’s more dovish officials have been cautious in their public comments. ECB President Christine Lagarde recently told European lawmakers that while the central bank is on a “disinflationary path,” it will remain flexible on the pace of rate cuts.
“I’m not going to commit to any particular number, for sure,” she stated.
Most economists continue to expect gradual, quarter-point rate cuts at each of the ECB’s upcoming meetings. Projections compiled by Bloomberg suggest that the ECB will continue with 25 basis-point reductions at every meeting until the deposit rate reaches 2% by mid-2024—significantly earlier than prior forecasts, which anticipated that rate being reached by the end of 2024.
Christian Keller, head of economic research at Barclays, said he would “almost exclude a half-point step for December” but acknowledged that the chances of a larger cut could rise in early 2024 if economic conditions worsen.
The ECB’s updated projections, due this week, will provide fresh insight into policymakers’ thinking. The forecasts will extend as far as 2027 and are expected to address key risks, including geopolitical conflicts, global trade pressures, and fiscal concerns.
All eyes are on the ECB’s December 11-12 meeting, where the debate over the size of rate cuts will take center stage. While most analysts believe a quarter-point reduction remains the most likely outcome, the possibility of a half-point move is unlikely to disappear as long as inflation expectations stay low and economic growth remains sluggish.
The ECB’s cautious approach to policymaking means it is unlikely to pre-commit to a course of action. Instead, it will continue to “move step by step,” as President Lagarde put it. For now, market participants will be watching for any shifts in sentiment among key policymakers, as well as updates to the ECB’s economic projections.
