The European Central Bank on Thursday, December 12, adopted the fourth decision since the beginning of the current year on cutting interest rates, which corresponds to the preliminary expectations of experts regarding the actions of this financial regulator in the context of the dynamic of monetary policy.
In this case, the cost of borrowing was lowered by a quarter of a percentage point. The deposit facility, the key rate of the European financial regulator, is currently 3%.
The European financial regulator has removed its more than once repeated message in the recent past that the cost of borrowing should be kept sufficiently restrictive for as long as necessary. Traders paid close attention to this message.
In a statement issued by the European Central Bank on Thursday, it was noted that nowadays the disinflationary process is well on track.
The quarterly staff macroeconomic forecasts of the European financial regulator have been revised. Currently, inflation in the eurozone for the current year is expected to be fixed at 2.4%. The previous version of this forecast provided that the mentioned figure would be 2.5%. The inflation projection for 2025 has also been revised. The European Central Bank expects the corresponding figure to be fixed at 2.1% next year. The previous version of this forecast provided for inflation of 2.2% in 2025.
The European financial regulator has also revised its vision of the prospects for economic growth in the eurozone. In this case, there is a deterioration in the prognosis. Currently, the European Central Bank expects economic growth in the mentioned region to be 0.7% in 2024. The previous version of the forecast provided that this indicator would be fixed at 0.8%. The financial institution also expects economic growth in the eurozone to reach 1.1% next year. The previous version of the forecast provided that the corresponding indicator would be fixed at 1.3%.
The President of the European Central Bank, Christine Lagarde, said at a press conference on Thursday that the risks to economic growth were still tilted to the downside. In this context, she drew attention to the increasing friction in global trade and the decline in consumer and business confidence.
Currently, Europe is grappling with potential tariff sweeping, which has been repeatedly stated by Donald Trump, who won the United States presidential election last month. Experts said that the mentioned intentions of Mr. Trump form an uncertainty factor in the context of economic forecasts for 2025.
It is worth noting that in the autumn, expectations were still relevant that the European Central Bank could cut interest rates by 50 basis points. Over time, this vision began to move away from the most likely prospects of the dynamic of reality. The reason for the corresponding process was that headline inflation began to approach the European Central Bank’s target of 2%.
It is also worth noting that currently in the largest manufacturing economies of the eurozone, the dynamic of growth is showing continued signs of weakening. The corresponding state of affairs is relevant, including for Germany.
Money markets priced in a fourth 25 basis point cut, amid concerns over the recent uptick in negotiated wage growth and persistence in service sector inflation.
During a press conference, Christine Lagarde said that some members of the Governing Council had proposed to lower the cost of borrowing by 50 basis points. According to her, the relevant proposal was discussed. She stated that there was an overall agreement that cutting interest rates by 25 basis points was the right decision. A significant factor impacting the relevant position of officials of the European Central Bank was the fact that inflation projections have converged toward 2% six times in a row. Also, the decision of the financial regulator is due to the circumstance that the pressure on wages has decreased.
It is worth noting that the victory over inflation is still not a fact of objective economic reality for the eurozone.
During the press conference, Christine Lagarde drew attention to the fact that high inflation continues to persist in the service sector. She said that officials of the European Central Bank would really like to see changes in the inflation composition to be fully confident of approaching the target.
According to the media, referring to experts, the statements of the European financial regulator made on Thursday are unequivocal evidence of its focus on continuing to implement an action strategy based on an approach providing for continued lowering of borrowing costs. In general, the realism of the further materialization of this position of the European Central Bank does not contradict the current circumstances and factors shaping the present situation in the space of the economic reality of the eurozone. At the same time, it is worth mentioning the so-called tariff threat from the United States. If the relevant intentions of Donald Trump are implemented in the plane of practical actions, the economic system of the eurozone will face sensitive and large-scale consequences. Higher tariffs on goods imported to the United States from Europe cannot remain unnoticed or minimally significant for Brussels. It is also worth mentioning the global uncertainty that is characteristic of both the entire global economy and the respective systems of individual countries. The ongoing and increasing geopolitical tensions which show no signs of weakening make this factor more significant.
Economists said that there is currently no understanding of where the European financial regulator sees the so-called neutral rate. In this case, it means an indicator that does not limit economic growth and at the same time is not a factor stimulating the corresponding process.
Mark Wall, chief European economist at Deutsche Bank, said that the European Central Bank continues to describe the current financing conditions as tight, but has already declined to mention the need to keep monetary policy sufficiently restrictive for as long as necessary. According to the expert, in this case, the financial regulator signals an easing bias. He also said that for the market, which has been pricing the chances of a sub-neutral terminal rate in 2025, the decision of the European Central Bank, adopted on Thursday, will feel like an endorsement.
The terminal rate is the point at which the European financial regulator will end the current cycle of cutting interest rates.
Dean Turner, chief eurozone and UK economist at UBS Global Wealth Management, said that the combination of easing medium-term inflationary pressures and weak economic growth indicates that the European Central Bank will continue to lower borrowing costs at each meeting until June, taking the deposit rate to 2%.
Money markets are currently predicting that interest rate cutting will continue in the eurozone. The corresponding vision provides that the European financial regulator will lower the cost of borrowing to 1.75% in September next year.
It is worth noting that the European Central Bank’s policymakers do not have a consensus on where they see the neutral rate. Some economists suggest that the overall view of the financial regulator about this indicator is between 2% and 2.5%. On Thursday, Christine Lagarde said that a neutral rate was not discussed at the December meeting.
Commenting on the potential tariff increase by the United States, the President of the European Central Bank noted that these measures are likely to be net inflationary for the eurozone. At the same time, she stated that the situation remains uncertain in the relevant context. Moreover, Christine Lagarde stated her opinion regarding the fact that trade restrictions and protectionist measures do not contribute to economic growth. She also noted that the mentioned decisions ultimately have an impact on inflation, which is largely uncertain.
Separately, it is worth paying attention to the fact that restrictive measures can generate something that corresponds to such a concept as a two-way effect. For example, many experts are currently warning that the tariff increase that Donald Trump intends to implement may cause inflation to accelerate in the United States. In this case, the side of the restrictive measures practice that will face less damage will be in the best position. It’s not likely to be the eurozone.
Christine Lagarde suggests that in the short term, restrictive measures are likely to be net inflationary, but the overall impact on inflation remains uncertain. According to her, the configuration of the mentioned impact will depend on the scale of the restrictions and on what response solutions will be imposed in this case. She also stated that in this case, the impact factors will be changes in the direction of trade flows from other parts of the world. According to her, this is a very difficult situation with moveable parts.
Jens Eisenschmidt, chief European economist at Morgan Stanley, said very pronounced weakness in upcoming eurozone Purchasing Managers’ Index’ figures and weak December inflation could tilt the balance towards a bigger lowering of borrowing costs by half a percent in January. According to the expert, on Thursday the European Central Bank did not cut interest rates on the mentioned scale due to uncertainty about how close the financial regulator is to neutral. Jens Eisenschmidt suggested that the mentioned issue will be the subject of ongoing discussion between council members over the next month.
Christine Lagarde said that the European Central Bank is not making any prior commitments to rate path. It is worth noting that the financial regulator has repeatedly stated its commitment to the appropriate approach. In this case, it is assumed that the bank makes decisions on monetary policy paying attention to the latest data on the state of affairs in the economic space. The Federal Reserve System also adheres to the appropriate approach.
Stefan Gerlach, chief economist at EFG Bank, said that the trajectory of interest rate cuts by the European Central Bank next year will depend on the impact of Donald Trump’s policies on the global economy and economic growth in the eurozone. According to the expert, the financial regulator may start lowering the cost of borrowing faster and more often against the background of trade barriers that threaten a further slowdown in the corresponding region.
It’s worth noting that Donald Trump’s future policies are not yet what can be called a fact realized in the space of practical actions. The probability that all declared intentions will be fully materialized is not minimal. Also, do not exclude the potential scenario that the mentioned intentions will be implemented on a limited scale. Moreover, hypothetically, it can be assumed that some plans will be canceled altogether, although Donald Trump has not yet demonstrated such a mindset.
After winning the election, Mr. Trump repeated his intentions regarding raising tariffs on imported goods. After winning the election, he confirmed plans to impose appropriate measures on shipments of products from Mexico, Canada, and China. At the same time, the eurozone is assessed by many experts as a very vulnerable territory in terms of the likely scale of the impact of a potential tightening of the tariff policy of the United States. Trade tensions between Brussels and Washington are a real prospect. It is worth noting that it is currently also expected that after the inauguration of Donald Trump, scheduled for January, taxes will be cut in the US and deregulation will take place. Many economists suggest that these factors could potentially contribute to the drawing of investments from Europe.
