The financial markets are anticipating the European Central Bank's first decision for 2025, amidst strong expectations of a 25 basis point interest rate cut to 2.90%, which would mark the fourth consecutive reduction in borrowing costs. Investors are paying close attention to the interest rate statement and the press conference by Christine Lagarde, the bank's president, to gain insights into the future of European monetary policy.
European Economic Indicators Support Interest Rate Cut According to data from the European Statistics Office, annual inflation in the Eurozone stabilized at 2.4% in December, aligning with market expectations, while core inflation reached 2.7%, reflecting a continued easing of inflationary pressures. Read more.
In terms of economic sector performance, S&P Global data showed that the Manufacturing Purchasing Managers' Index recorded a contraction at 46.1 points in January, exceeding expectations of 45.6 points, while the Services sector index held steady at 51.4 points, in line with predictions. More details.
Regarding economic growth, the German government revised its GDP growth forecast for 2025 down to 0.3% compared to previous estimates of 1.1%, indicating a continued slowdown in the largest European economy. Read more.
Comments from ECB Members Bolster Interest Rate Cut Scenario Several members of the European Central Bank indicated their support for continuing interest rate cuts, as Joachim Nagel, known for his hawkish stance, stated that inflation in the Eurozone would reach the 2% target by mid-year, supported by slowing wage growth and weak economic activity.
For his part, José Luis Escrivá, a member of the bank’s board, confirmed that a 25 basis point rate cut remains a valid option, but stressed the need to assess economic data before making a final decision.
Market Expectations: Interest Rate Cut is Imminent A Reuters survey indicated that the European Central Bank is expected to cut the deposit rate to 2.75% in its January 2025 meeting, as 77 economists agreed that this decision is likely. Details here.
Potential Scenarios for the Interest Rate Decision The first scenario is that the European Central Bank will cut interest rates by 25 basis points, with indications of further potential cuts in upcoming meetings, in an attempt to support economic growth, especially as inflation continues to slow and industrial and service sector activity indicators decline. In this case, an inclination towards loosening monetary policy may exert negative pressure on the euro, increasing its depreciation against other currencies.
The second scenario involves the ECB reducing rates by the same amount but adopting a more cautious stance regarding future steps, indicating the possibility of holding rates steady for a while until more economic data is released. Such a decision could lead the markets to view the euro more positively, as they may interpret it as a balanced step that considers the need to support growth without hastily implementing excessive easing measures that could harm long-term economic stability.