The ECB will cut interest rates again, signaling further easing as growth slows By Reuters

Authors Balaž Koranji and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank is all but certain to cut interest rates again on Thursday and hint at further easing in 2025 as euro zone inflation is almost back on target and the economy falters.

The ECB has already cut rates at three of the last four meetings. Still, the debate has shifted to whether he is easing policy fast enough to support an economy at risk of recession, in the face of political instability at home and the prospect of a new trade war with the United States.

That issue is likely to dominate Thursday’s meeting, but political hawks, who still have a comfortable majority on the 26-member Governing Council, are likely to support only a small cut of 25 basis points, taking the benchmark rate to 3%, they almost said. all economists in a Reuters poll.

In a possible compromise with more dovish policymakers, the tapering could come with changes to the ECB’s guidance to make clear that further policy easing is coming provided there are no further shocks to inflation, which could narrow to the central bank’s target of 2% in the first half of 2025.

“The already restrictive policy stance, the worsening outlook for growth and the inflation target should speak in favor of a 50 basis point cut,” Danske Bank (CSE:) said economist Piet Haines Christiansen.

“From a communication perspective, I think it’s easier to deliver a 25 basis point rate cut while retaining the ability to deliver a jumbo cut if they see the need for it.”

The cut is justified because the new projections will show inflation, above the target for three years, back to 2% in a few months. That’s partly because economies are barely growing in the 20 countries that share the euro.

The outlook is so fraught with risks that some policymakers argue that the ECB now risks missing its inflation target, as it did nearly a decade before the pandemic, and should move faster to keep up with the curve.

But hawks say inflation remains a risk given fast wage growth and rapidly rising service prices, so a steady stream of incremental steps is appropriate.

American protectionism and political instability in France and Germany are additional reasons for caution.

Governing Council members simply don’t know what policies the new US administration of President-elect Donald Trump will approve, how Europe will react – or what the economic impact will be.

Political turmoil in France and upcoming elections in Germany add to the uncertainty and could force the ECB to step in, bolstering arguments that it should leave itself room to take bold action if necessary, keeping its powder dry for now.

“There is a big risk that against the background of Trump, France and Germany, the growth of the Eurozone will be much weaker than the ECB’s projections will show,” said ING economist Carsten Brzeski.

“The only problem for the ECB to preemptively react to current political problems is that it could be seen as an intervention in national politics on behalf of France,” Brzeski added.

A SERIES OF CUTS

Financial markets took a full 25 basis point rate cut on Thursday, with the prospect of a bigger move now close to zero – a big change from a few weeks ago when a half percentage point cut was seen as a real possibility.

Investors then see a cut at each meeting until June, followed by at least one more move in the second half of 2025, taking the deposit rate to at least 1.75% by the end of the year.

Any change in ECB guidance going forward is likely to be on the margins.

He could drop the call for “restrictive” policy to tame inflation, an implicit signal that rates will at least fall to a so-called neutral level where they neither stimulate nor dampen economic activity.

The problem is that neutrality is an undefined concept and every policymaker has a different estimate, putting the range between 1.75% and 3%, and most seeing it between 2% and 2.5%.

But the ECB is likely to keep its intentions vague after repeatedly getting burned by making explicit commitments that have proven difficult or impossible to keep.

“With inflation on track to settle to the 2% target next year, we think the ECB will soon remove the reference to its intention to keep rates ‘sufficiently restrictive,'” said UBS economist Reinhard Clouse.

“We think the ECB will also cut rates by 25 basis points at each of the next four meetings, bringing the interest rate to a broadly neutral 2% until June.”