Introduction to the ECB’s expectations
The week that begins today promises to be decisive for the economic future of the eurozone, with particular attention paid to the meeting of the European Central Bank (ECB) scheduled for Thursday, December 12. Economists are abuzz, with most of them expecting a further cut in interest rates, a step that could significantly affect the European economy
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The economists’ forecasts
According to a survey conducted by Reuters, out of 75 economists interviewed, almost all but two expect a cut of 25 basis points. This would be the fourth such intervention in 2024, a clear sign of the ECB’s willingness to stimulate the economy in a context of slow growth and inflation under control. Some analysts, such as those at eToro, do not rule out a more aggressive cut of 50 basis points, but they expect the ECB to adopt a more cautious approach, opting for a more
modest reduction.
The dynamics of the labor market
David Pascucci, market analyst for XTB, expects the interest rate to fall from 0.25%, bringing the rate from 3.4% to 3.15%. However, he warns that a more significant cut could only take place if the labor market deteriorates, which is currently showing signs of strength. The ECB, as pointed out by Konstantin Veit of PIMCO, could decide to reduce the deposit rate by 25 basis points, maintaining room for maneuver to face any future inflationary shocks
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Macroeconomic projections and inflation
The Eurosystem’s new macroeconomic projections, which will include data up to 2027, could show inflation in line with the ECB’s objective starting in mid-2025. However, for this to happen, it is essential that labor cost growth per unit of product stabilizes at levels compatible with 2% inflation. The ECB will therefore face uncertainty regarding the neutrality interval and persistent inflationary pressures,
especially in the services sector.
Future strategies of the ECB
Looking to the future, Veit estimates a terminal rate of around 1.8% for the second half of next year, consistent with the neutral rate estimates for the euro area. Even David Zahn of Franklin Templeton envisages a gradual approach on the part of the ECB, with cuts of 25 basis points at each meeting up to rates below 2%. Despite the political turmoil in France and Germany, the ECB is unlikely to change its course, continuing to closely monitor economic indicators
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Conclusions on economic expectations
In summary, expectations for the ECB’s interest rates are constantly evolving, with a growing number of economists expecting further cuts in the coming months. With about 80% of respondents anticipating two further reductions in the next quarter, the European economic climate seems to be oriented towards a more accommodative monetary policy, in response to slow growth and inflation that will remain below the
target until 2026.