Euro Area: ECB decreases rates in December
Easing cycle continues: At its meeting on 12 December, the European Central Bank (ECB) decided to cut the deposit rate by 25 basis points to 3.00%. It also lowered the refinancing rate and the lending rate by 25 basis points to 3.15% and 3.40%, respectively. The decision marked the third cut in a row since September and aligned with market expectations.
Ongoing disinflation and weak growth prospects motivate cut: The ECB stated that the disinflation process is on track and expects inflation to settle around its 2.0% target sustainably in the medium term, projecting an average rate of 2.1% in 2025, slightly below its prior forecast of 2.2%. Moreover, the ECB now expects a slower economic recovery than it did in September, with 2025 GDP growth projected at 1.1%, down from 1.3% previously, due to weaker exports growth. Notably, this forecast does not include the effect of Donald Trump’s recent reelection plus political shakeups in Germany and France. All in all, this increasingly gloomy GDP growth outlook further motivated the cut.
Further monetary policy easing ahead: The Bank’s forward guidance became more dovish, as it dropped the mention of “keeping interest rate sufficiently restrictive for as long as needed”. Meanwhile, Governor Christine Lagarde stated that it was too early to react to any economic policies possibly coming from the new U.S. government. Our Consensus is for the ECB to lower the deposit rate by about 100 basis points by the end of 2025. The Bank is set to reconvene on 30 January.
Panelist insight: Carlos Castellano and María Martínez, economists at BBVA Research, commented:
“In sum, the ECB struck a relatively dovish tone today while delivering the widely anticipated rate cut. This aligns with the ongoing progress in the disinflation process, the softer momentum in the Eurozone economy, and the slight downward revisions to inflation and growth projections. After the meeting, we continue to expect four more rate cuts during the first half of 2025, to land at 2%”
ING’s Carsten Brzeski held a more dovish view:
“Given the high risk that [the ECB’s] growth outlook is too optimistic, at least in the short term, going to neutral might not be enough. As much as the ECB tries to rightly point the finger at governments to use structural reforms to improve growth prospects, with political woes in France and Germany, the risk is high that the bank will still have to do the heavy lifting, at least over the coming months. This is why we expect more cuts, and we’ll reach 1.75% by next summer.”