At the last meeting of the year, as widely anticipated, the ECB announced another 25 basis point interest rate cut (the third consecutive cut and the fourth this year), leaving the deposit facility rate at 3%, down from 4% at the beginning of the year. Although there was some discussion about the possibility of a 50 basis point cut, the decision to reduce rates by 25 basis points was ultimately unanimous.
With the deposit facility rate at 3%, the central bank considers that, although financing conditions are easing, rates remain restrictive to address current risks and persistent inflationary pressures.
As is customary at end-of-quarter meetings, the ECB’s decision was accompanied by the Eurosystem staff’s macroeconomic projections for the coming years.
Based on recent data, such as the PMIs, which showed persistent weakness in the region’s business sector—with the industrial sector still depressed and the services sector weak and weakening—the projections, as expected, show weaker economic growth than previously anticipated. Over time, the staff expects the economy to recover, but this recovery is likely to be slower than previously expected, indicating that growth risks remain tilted to the downside.
Regarding inflation expectations, core inflation projections remained largely unchanged compared with the September forecasts, reflecting still-elevated wage pressures stemming from a resilient labor market, which, although slightly weakened, is expected to remain quite strong. Headline inflation was slightly revised downward, reflecting weaker growth prospects for the region and the fact that the risks of undershooting and overshooting are now more balanced than before.
On the topic of inflation, Lagarde noted that the recent price acceleration was expected and was primarily driven by higher energy costs. The ECB Governing Council expects inflation to remain at current levels for some time before stabilizing around the 2% target.
The ECB President did not provide any forward guidance; however, it is worth noting that the official ECB statement no longer mentioned the need to “keep interest rates sufficiently restrictive,” signaling that the central bank will likely continue to gradually cut rates until they reach the neutral level. Nevertheless, Lagarde emphasized that they will continue to follow a meeting-by-meeting approach and will not commit to decisions for the coming months.
Despite the more dovish tone of the statement, European bond yields rose, with the 10-year German Bund yield increasing by 8 basis points. Market expectations for next year remained largely unchanged following the meeting, with investors pricing in over 120 basis points of rate cuts for 2025, leaving the deposit facility rate at 1.75%.
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