La Française: ECB to proceed with caution

La Française: ECB to proceed with caution

December 10, 2024

ECB
ECB (2).jpg

The European Central Bank (ECB) is expected to cut its key interest rate by 25 basis points (bps) during its final meeting of the year in response to downward growth and inflation risks. This move is likely to be reflected in the revision of its macroeconomic projections. However, despite signs of economic weakness in the region, we do not expect the ECB will accelerate its monetary easing in December, by opting for a 50 bp cut.

These are our expectations:

  • The Governing Council of the ECB will cut the key reference rate (deposit facility rate) by 25 bps to 3.0 %.
  • Given that services inflation remains too high (around 4%), we do not expect any change in communication regarding European monetary policy during this meeting. The ECB will likely maintain its data-dependent approach, taking decisions on a meeting-by-meeting basis without committing in advance to a specific interest rate trajectory. However, the ECB will point out that further interest rate reductions towards the ‘neutral zone’ (which neither stimulates nor restrains economic growth), estimated at around 2 %, are expected to continue in the coming months. 
  • In its new economic projections:
    • In line with statements of its members since October, we expect that the ECB will report that overall inflation will return to the 2 % target by Q4 2025 (as was the case in its September forecast). The ECB will also likely lower its inflation forecast for 2025 (-0.1% versus September expectations) while keeping core inflation (excluding food and energy prices) slightly above the target. Moreover, we expect that the ECB will unveil inflation expectations for 2027, with core inflation expected to stabilize at 2%.
    • Regarding growth, projections are expected to be revised down slightly for 2025 and 2026 (-10 bps, 1.2% and 1.4%, respectively). ECB president Christine Lagarde will signal that these forecasts are surrounded by significant uncertainties related to fiscal policies in the two largest economies of the region (France and Germany).

In summary, the European Central Bank is likely to stick to gradual rate cuts despite a fragile economic environment. However, echoing comments from ECB chief economist Philip Lane, Christine Lagarde might indicate in the press conference a possible shift away from the data-dependent strategy in the future (once ‘the disinflation process is complete’) in favor of an approach focused on assessing future risks. There are few expectations associated with this meeting other than a 25 bp cut. There is a very slim chance that there will be a more accommodative stance leading rates lower across the curve.

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