The ECB cut rates by 25 basis points to 3%, dropping its commitment to keep policy “sufficiently restrictive” and signalling confidence in achieving its 2% inflation target. Economists expect gradual cuts to continue, with risks from trade tensions and geopolitical uncertainties looming.
The European Central Bank (ECB) delivered its fourth rate cut of the year on Thursday, lowering the deposit facility rate by 25 basis points to 3% and dropping its commitment to keep policy rates “sufficiently restrictive” to achieve its 2% inflation target.
The decision signals confidence that inflation is on track to meet the ECB’s goal, while acknowledging downside risks to growth.
President Christine Lagarde revealed that the Governing Council debated a larger 50 basis point cut but ultimately agreed on 25 basis points as the appropriate step.
On Friday, Mario Centeno, Bank of Portugal Governor, who also sits on the ECB Governing Council, suggested rates could approach 2% in the coming quarters, barring major shifts in inflation data.
Yet, he also warned of uncertainties stemming from geopolitical risks, US trade policy, and uneven fiscal plans within the European Union.
Economists now widely expect further easing from Frankfurt, although views differ on the pace and endpoint of the current cycle.
Economists’ perspectives on the ECB rate path
Bill Diviney, head of macro research at ABN Amro, interpreted the ECB’s communication as a signal that policymakers are comfortable bringing rates back to neutral levels, assuming the current inflation outlook is maintained.
He anticipates gradual 25 basis point cuts through 2024, with rates eventually reaching 1%.
Diviney believes the neutral interest rate in the eurozone is even lower than the ECB’s internal estimate, citing “demographics and weak productivity [that] are weighing on trend economic growth.”
He predicts US-EU trade tensions could act as a disinflationary force. “We think EU retaliation to US tariffs will be targeted, limiting the direct impact on inflation. Inflation will be weighed down by the negative impact on growth domestically, but also by weakness in global trade and manufacturing.”
Ruben Segura Cayuela, economist at Bank of America, viewed the ECB’s decision as marking a shift from its previously hawkish stance.
“At the margin, we would argue, the ECB has more firmly abolished its hawkish communication bias,” he said.
The removal of restrictive language signals a dovish outlook, with Cayuela forecasting deposit rates to fall to 1.5% by September 2024. The economist noted that renewed uncertainties, particularly around tariffs and trade policy, could prompt faster rate cuts, but that the data would need to deteriorate significantly for this to occur.
Intesa Sanpaolo’s forex analyst Luca Cigognini highlighted the growing divergence between ECB and Federal Reserve policy, which is weighing on the euro. “After yesterday’s meeting, the ECB seems geared to continue on the path of rate cuts with a downward revision of growth and inflation rates for 2025,” he said. He also pointed to technical developments in EUR/USD, noting that the break of key levels opened the door to broader euro weakness.
Sven Jari Stehn, economist at Goldman Sachs, emphasised the ECB’s softer language on both growth and inflation, viewing it as a cautious approach to policy. “The formal language on growth was softened, and the language on inflation was weakened,” he observed. Stehn expects the ECB to deliver another 25 basis point cut in January, with rates reaching 1.75% by mid-2025.
Roberto Cobo, chief strategist at BBVA, described the ECB’s rate cut as expected, noting that it followed a slight downgrade to inflation and growth projections for 2025.
“Overall, the ECB stuck to the script, cutting rates by 25bp,” he said.
Cobo expects the ECB to take a gradual approach to rate cuts in 2025, particularly given the absence of a recession in current projections.
He also indicated that the lack of clarity from Lagarde on the neutral rate leaves room for speculation, which could remain a key market focus in the months ahead.
Interest rates are poised to decline further, yet risks loom large
Economists broadly agree that the ECB is moving toward a more dovish stance, with neutral or even accommodative rates expected in the near term.
While the direction is clear, uncertainties – ranging from trade risks to geopolitical tensions – add significant complexity to the outlook.
With many expecting 25 basis point cuts at upcoming meetings, the pace and depth of future easing will depend heavily on incoming data and the evolution of external risks.
