The ECB decides to cut interest rates again: What will happen next and why it matters!
The European Central Bank (ECB) is poised to cut its deposit rate by 25 basis points to 3% on Thursday, marking the third straight cut in borrowing costs as the eurozone grapples with slowing economic momentum and subdued inflationary pressures. .
While the move is seen as a done deal by market participants, attention will focus on ECB President Christine Lagarde's guidance on the way forward. With inflation softening and economic growth low, economists and analysts predict the central bank will maintain its easing momentum well into 2025. How much can the ECB cut interest rates after December?
Economists and analysts are almost unanimous in expecting a 25 basis point cut, with forecasts pointing to a further cycle of gradual easing in 2025. Bank of America expects the ECB to maintain its current pace, cutting rates at each meeting until the deposit rate reaches 1.5%. until September 2025.
" With an economy set to grow at or below trend for most of 2025, it will be difficult for the ECB to hold off on rate cuts until the deposit rate falls slightly below its neutral estimate of 2%,” Bank of America said. the analysts. They added: " At this point, 1.5% is easily becoming an upper limit. " Danske Bank shares this view, predicting that the ECB will deliver a series of cuts over the next two years, eventually reaching a terminal deposit rate of 1.5%.
Goldman Sachs paints a similar picture, with its baseline scenario envisaging successive cuts of 25 bp until the deposit rate reaches 1.75% by July 2025. The investment bank expects the ECB's Governing Council to remove references to statements to keep "policy rates quite restrictive for as long as necessary", and ECB Lagarde to hint at another rate cut in January.
How can inflation evolve?
Thursday's meeting will also bring new ECB economic projections, which could provide hints on the trajectory of monetary policy. ABN Amro expects only minor changes to the ECB's growth forecasts, but foresees a more significant revision of inflation forecasts for 2025. " We expect that headline inflation for 2025 could see a more significant decrease, with the forecast our at 2% compared to the September forecast of 2.2% ," said Arjen van Dijkhuizen, senior economist at ABN Amro.
The risk of inflation falling below the ECB's target could further justify prolonged rate cuts. Bank of America expects Lagarde to emphasize that the risk of inflation overshooting has receded, leaving room for policy rates to fall below neutral if economic conditions worsen.
Does the euro face downside risks?
The ECB's wild swing could put downward pressure on the euro, a scenario some analysts see as likely in the coming months. Bank of America sees "modest risks to the euro from the meeting and around the ECB's relative stance in the coming months."
ING Group analyst Chris Turner remains bearish on the euro and believes the single currency " is now poised to resume its upward trend if macro and geopolitical inputs allow" . He added: "This month EUR/USD remains in supply despite a strong seasonal uptrend. Typically January and February turn out to be bear months for EUR/USD."
How lower interest rates could affect the real economy of the eurozone
Lower interest rates are designed to stimulate economic activity by making borrowing cheaper for households and businesses. In the eurozone, where small and medium-sized enterprises rely heavily on bank loans, cheaper loans could provide a much-needed windfall for investment.
For sectors like real estate, the benefits can be very responsive. Mortgage rates, which have risen in recent years, may ease as central bank cuts ripple through financial markets. This could help revive demand for housing after years of a sharp decline in home sales.
Lower borrowing costs may also prompt households to spend more on big-ticket items such as cars, home improvements or durable goods, providing a boost to domestic consumption.
A weaker euro, which may stem from the ECB's dovish stance, further amplifies these effects. As the currency depreciates, eurozone exports become more competitive in global markets, potentially providing a windfall for export-heavy industries such as car manufacturing, machinery and chemicals.
However, currency devaluation is a double-edged sword. While exports may be booming, a weaker euro raises the cost of imported goods, including energy and raw materials. This may partially offset the benefits of lower borrowing costs, especially for businesses that depend on imported inputs.
However, geopolitical uncertainties, including ongoing conflicts in Ukraine and the Middle East, as well as trade tensions with the United States, especially the threat of renewed tariffs, pose a clear challenge for European firms.
Businesses may be reluctant to invest or expand despite favorable financial conditions, highlighting the limits of monetary policy in an unpredictable global environment. Ultimately, the ECB's rate cuts are an essential tool for supporting economic activity, but their effectiveness will depend on how businesses, consumers and global markets respond in the coming months.
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