The European Central Bank cut interest rates by 25 basis points to an estimated 3%, the fourth straight cut this year by the same level, as inflation moves closer to its 2% target.

Thus, the interest rates of the deposit facility, the main refinancing operations and the marginal financing facility will be reduced to 3.00%, 3.15% and 3.40% respectively, with effect from 18 December 2024.

It is noted that all but one of the analysts polled by Bloomberg predicted a further 25bp rate cut. today. Only JPMorgan Chase “saw” more movement, down 50 bps, arguing that recent data points to softer growth and inflation.

In its announcement, the ECB states that the inflation de-escalation process is on track. According to experts, headline inflation will average 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027 when the enlarged EU Emissions Trading System becomes operational. Inflation excluding energy and food prices is forecast by experts to average 2.9% in 2024, 2.3% in 2025 and 1.9% in both 2026 and in 2027.

In addition, it is reported that most indicators of core inflation suggest that inflation will stabilize around the Governing Council’s medium-term objective of a rate of 2% on a sustainable basis. Domestic inflation eased but remains high, mainly because wages and prices in some sectors are still adjusting with a significant lag to the previously strong rise in inflation.

According to the ECB, funding conditions are easing as the Governing Council’s recent interest rate cuts gradually make it less expensive for businesses and households to take out new loans. But they remain tight because monetary policy remains tight and past rate hikes continue to feed through to outstanding credit.

Experts now expect a slower economic recovery than September projections. Although the growth rate accelerated in the third quarter of this year, survey indicators suggest that it slowed down in the current quarter. According to experts, the growth rate of the economy will be 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027. The projected recovery is mainly due to the rise in real incomes – which should allow households to consume more – and to increase investment by businesses. Over time, the gradual weakening of the effects of accommodative monetary policy should support the recovery in domestic demand.

“The Governing Council is determined to ensure that inflation stabilizes in a sustainable way towards the medium-term objective of 2%. It will take an evidence-based approach and take decisions on a meeting-by-meeting basis to determine the appropriate direction of monetary policy Specifically, the Governing Council’s interest rate decisions will be based on its assessment of the outlook for inflation in light of incoming economic and financial data, the dynamics of underlying inflation and the intensity with which monetary policy is transmitted. The Governing Council is not committed to a specific course of interest rates” emphasized in the announcement.

The Governing Council of the ECB states that it is ready to adjust all the instruments at its disposal within the limits of the mandate assigned to it, in order to ensure that inflation stabilizes in a sustainable way to the 2% target in the medium term and to safeguard the smooth functioning of the monetary policy transmission mechanism. In addition, the Transmission Protection Instrument (TPI) is available to hedge against undesired, disorderly market developments that pose a serious threat to the transmission of monetary policy across euro area countries, thus allowing the Governing Council to of the ECB to more effectively fulfill its mission of price stability.

Economists, however, expect successive reductions of 25 bp. until interest rates hit 2%, according to Bloomberg.

It is recalled that the annual inflation of the Eurozone fell below the level of 2% in September – for the first time since the summer of 2021 – to 1.7%, while it then reached 2% in October and 2.3% in November , according to Eurostat.

Surprise move by the Swiss Central Bank

Earlier today the The Swiss National Bank (SNB) has cut its interest rate by 50 basis points on Thursday, the biggest decline in nearly 10 years, to limit a possible strengthening of the Swiss franc. Notably, the SNB cut interest rates from 1.0% to 0.5%, the lowest level since November 2022. While markets had anticipated the move, more than 85% of economists polled by Reuters they expected a smaller decline of 25 basis points.

Next week, specifically on December 18, the decision on interest rates from the Federal Bank of the USA (Fed) is expected.