European Central Bank Cuts Interest Rates: December 2024
As 2024 draws to a close, the ECB (European Central Bank) on Thursday 12th December cut interest rates for the fourth time this year. This is the third back-to-back interest rate cut, bringing total quantitative easing to 100 basis points for the year. As inflation draws closer to the key benchmark figure of 2%, the ECB cut its key deposit rate by 25 basis points (1/4 of 1%) from 3.25% to 3%.
It is interesting to note that there has been a change in rhetoric coming out of the ECB, where the statement “keeping rates sufficiently restrictive for as long as necessary” has been dropped, indicating a more dovish attitude to interest rate cuts. The ECB said in a statement “The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium target, and it will follow a data-dependent and meeting-by-meeting approach determining the appropriate monetary policy stance”.
Despite no firm commitment from the ECB, and whilst the economy remains weak and inflation is closing in on the target of 2%, financial markets feel the door has been left open for further cuts in 2025. The ECB has also cut its prediction for growth next year, with President Lagarde seeing risks to growth tilted to the downside, leaving many analysts convinced that there will be more rate cuts in 2025.
The ECB also produced their quarterly staff macroeconomic projections, lowering their inflation forecast for 2024 from 2.5% down 0.1% to 2.4%, with the outlook for 2025 also being lowered by 0.1% from 2.2% down to 2.1%. Meanwhile, growth predictions for 2025 have been lowered by 0.2% to 1.1% down from 1.3%. Growth, as mentioned above, is tilted to the downside, with President Lagarde saying this will be partly due to “greater friction in global trade”. However, potential forecasts are definitely more difficult with experts citing President elect Donald Trump’s tariffs policy as the main reason for lack of clarity.
Experts said that messages from the ECB on Thursday 12 December showed a clear commitment to further interest rate cuts. However, there is uncertainty over where the Bank sees what they call the “Neutral Rate”, where their monetary policy is boosting or restricting growth. However, a number of economists have noted that weak PMIs* could push the ECB into a bigger cut of 50 basis points at their next policy meeting on Thursday 30th January 2025.
*PMI – This is an acronym for the Purchasing Managers Index and is an indicator of the prevailing direction of economic trends and service sectors. It looks at key indicators that show signs of retraction of growth in the economy such as production, employment, and inventory levels.
