Please find below a new comment from Nadia Gharbi, Senior Economist, at Pictet Wealth Management, ahead of this Thursday’s ECB meeting:
What do we expect?
- We expect the ECB’s Governing Council (GC) to continue its sequential easing by announcing a further 25bp rate cut on 12 December to bring the deposit rate down to 3.0%. This will be the fourth cut since the start of the bank’s easing cycle in June.
- A large majority of GC members have supported a 25bp cut in their recent communications, de facto ruling out a 50 bp one, reiterating the will to follow a gradual approach. The GC will likely stick to this view on Thursday, and not pre-commit to any set path for interest rate reductions.
- However, given the downside risks to the euro area’s growth prospects, we expect the GC to drop its hawkish bias towards a restrictive policy stance in the statement and signal instead a data-driven approach to removing policy restriction.
What will be the key focus of the press conference?
- The new ECB staff projections will probably show some modest downward revisions to growth and inflation. While growth exceeded the ECB’s expectations in Q3, partly due to a temporary boost from the Paris Olympics, surveys have been weak, pointing to a loss of momentum in the euro area economy. Uncertainty about the outlook has also been rising. Meanwhile, disinflation has advanced quicker than expected in the September staff projections, even if the GC is likely to note that services inflation remains strong. Measures of growth in labour costs have been mixed. The ECB’s measure of negotiated wages accelerated more than anticipated in Q3 (up from an annual pace of 3.5% in Q2 to 5.4% in Q3), but compensation per employee softened. The recent wage agreement reached between employers and IG Metall, Germany’s biggest trade union, suggest that wage growth will slow next year. Preliminary estimate for growth and inflation in 2027 are likely to be a key focus as well, with greater-than-usual emphasis on uncertainty in these projection.
- The potential impact of US tariffs on inflation will also be an important focus this week. GC member Isabelle Schnabel recently expressed the view (see here) that the net impact of tariffs is uncertain but probably inflationary. ECB president Christine Lagarde has expressed a similar view, but in the short term thinks that tariffs might be inflationary (see here). Given the uncertainty around tariffs/trade war/protectionism, Lagarde is likely to emphasise that the ECB will keep its policy options open for 2025.
- Last, it will also be important to hear if the ECB appears sensitive to FX weakness. Although the effect on growth should be limited, it will be key to listen to how Lagarde addresses any concerns regarding the implications of a weaker euro on inflation.
Looking into 2025
- Looking ahead, given subdued growth and inflation converging to the ECB’s 2% target, we expect the ECB to cut its policy rate by 25bp at each GC meeting until July 2025, bringing the deposit rate down to 1.75%. Risks around our baseline path are skewed towards lower rates, given downside risks to growth.
- With the end of PEPP reinvestment, the reduction of ECB’s balance sheet is also expected to accelerate in 2025.
