Fidelity International: Eyes on further easing and trade tensions

Fidelity International: Eyes on further easing and trade tensions

January 30, 2025

ECB
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By Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International

As widely expected, the European Central Bank (ECB) cut its key policy rates by 25 basis points to 2.75% at today's meeting. The accompanying statement remained largely unchanged, with the central bank continuing to emphasise its data-dependent approach and meeting-by-meeting assessment. 

"The ECB continues to deem its current stance as restrictive, signalling further cuts are coming until it reaches neutral. Market participants have largely aligned with the ECB's assessment of neutral rates around 2%. However, we see increased likelihood of cuts into accommodative territory given the challenging growth outlook.

While no new staff projections were released at this meeting, recent data indicates continued challenges in the growth outlook. Q4 GDP growth came in flat at 0.0%, below the ECB's previous projection of 0.2%, reinforcing downside risks to growth. On the inflation front, both headline and core measures ended Q4 lower than anticipated, but President Lagarde highlighted inflation upside risks stemming from potentially stickier wages and tighter supply chains on the back of greater global trade frictions. Higher energy prices and EUR depreciation are additional upside risks in the near-term. However, President Lagarde strongly reiterated that the disinflationary trend is "well on track.

The latest Bank Lending Survey revealed a further tightening in credit conditions, primarily driven by banks' heightened risk perception amid trade policy uncertainty, while continued weak lending growth further strengthens the case for additional monetary easing.

Looking ahead, we anticipate the ECB to maintain its current pace of rate cuts until reaching the neutral rate of around 2%, followed by a more gradual approach with cuts at alternate meetings. Our view remains more dovish than current market pricing, as we expect continued growth headwinds to push the terminal rate to 1.5% by year-end, notably due to persistent concerns over global trade tensions. We expect to see developments on the tariff front in coming weeks. This will be a critical driver of ECB policy going forward."

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