The European Central Bank (ECB) is expected to deliver its final interest rate cut of 2024, marking its fourth reduction this year.
The decision comes as inflation approaches the ECB’s 2% target and economic growth across the eurozone continues to falter.
Economists widely predict a 25-basis-point cut, which would lower the ECB’s key deposit facility rate from 3.25% to 3%. This would follow earlier cuts from a high of 4% in September 2023, as the central bank gradually eases monetary policy. Despite some speculation about a larger 50-basis-point reduction, most policymakers have signaled a preference for smaller, incremental moves.
The ECB’s decision is driven by two key factors: the steady decline in eurozone inflation and the region’s sluggish economic growth. While headline inflation has fallen closer to the ECB’s 2% target, core inflation, which excludes volatile elements like food and energy, has remained more persistent. Negotiated wage growth and high service sector prices have added to inflationary pressures, leading policymakers to favor caution in rate adjustments.
On the growth front, major eurozone economies, including Germany, are experiencing a downturn in industrial activity. This has prompted some ECB officials to argue for more aggressive rate cuts to boost demand. However, others believe it is prudent to maintain flexibility in the face of global uncertainties.
Market expectations indicate that Thursday’s rate cut may not be the last in this cycle. Projections suggest that the ECB will continue to reduce rates at every meeting until September 2025, eventually bringing the deposit rate to 1.5%. ECB watchers will also pay close attention to any adjustments in the bank’s forward guidance, particularly its reference to maintaining a “sufficiently restrictive” policy stance.
If the ECB signals a shift away from this restrictive stance, markets could interpret it as a sign of more aggressive rate cuts next year. Goldman Sachs analysts have suggested that lower rates could stimulate consumer spending, bolstering growth in 2025.
Uncertainty stemming from US trade policy under President-elect Donald Trump, as well as political instability in France and Germany, has further complicated the ECB’s decision-making process. Potential US tariffs on European imports and internal political turmoil in the eurozone’s largest economies could exacerbate the region’s economic challenges.
According to Stefan Gerlach, chief economist at EFG Bank, the ECB might be forced to accelerate rate cuts if US protectionist measures disrupt trade flows.
“If we see trade barriers that slow the European economy further, the ECB could decide to cut interest rates more rapidly,” Gerlach said.
Markets have already priced in a 25-basis-point rate cut, with little expectation of a larger reduction. As of midday Thursday, eurozone bond yields edged higher, with Germany’s 10-year bond yield rising to 2.153%. The euro strengthened slightly against the US dollar and other major currencies in anticipation of the rate decision.
The ECB’s Governing Council remains divided on how quickly rates should be cut. Policymakers are debating the concept of a “neutral rate” — the level at which monetary policy is neither restrictive nor stimulative. Estimates for the neutral rate range from 1.75% to 3%, adding to the challenge of setting clear forward guidance.
Investors will be focused on two key updates following Thursday’s decision:
- Macroeconomic Projections: The ECB will release updated forecasts for growth and inflation, providing insight into the central bank’s future moves.
- Policy Language: Any changes to the ECB’s guidance on future rate moves will be scrutinized. If policymakers hint at a faster pace of cuts, markets may revise expectations for the deposit rate’s eventual “landing zone.”
A more dovish shift in ECB communication would likely prompt market participants to lower their forecasts for where rates will settle. With analysts already anticipating rate cuts at every ECB meeting through mid-2025, any signs of a faster pace could influence bond yields and currency markets.
While the 25-basis-point reduction seems all but certain, the bigger question is how quickly the central bank will move in 2025.
