The European Central Bank (ECB) is gearing up for its last monetary policy decision of the year, with markets widely expecting a 25-basis-point rate cut on Thursday. This move, which will bring the key deposit facility rate down to 3%, marks the fourth rate reduction of 2024. However, speculation around a more aggressive 50-basis-point cut has diminished, as policymakers remain cautious about inflation trends and economic stability.
A Year of Monetary Easing
Throughout 2024, the ECB has taken steps to loosen monetary policy, progressively lowering its key interest rate from 4% to 3.25% in three 25-basis-point increments between June and October. These measures aim to address slowing economic growth in the eurozone while managing inflation, which has shown mixed signals in recent months.
November saw headline inflation rise unexpectedly to 2.3%, up from 2% in October, slightly above the ECB’s target. Meanwhile, the eurozone economy displayed resilience in the third quarter, growing at its fastest rate in two years with a modest 0.4% expansion. Despite these positive signs, economists warn of mounting downside risks to growth and inflation, particularly as geopolitical uncertainties loom large over the global economy.
Challenges Ahead
A key factor influencing the ECB’s cautious approach is the uptick in negotiated wage growth, which could spur inflationary pressures. Sylvain Broyer, chief EMEA economist at S&P Global Ratings, emphasized the importance of balancing inflation control with economic support. “There is no need to hurry up at this stage for the ECB,” Broyer said, adding that labor costs outpacing productivity growth warrant a “wait-and-see” approach.
Looking ahead, economists predict a faster pace of rate cuts in 2025 as the ECB seeks to bring monetary policy to a neutral stance that neither stimulates nor restricts growth. Broyer expects the central bank to maintain a steady course of 25-basis-point reductions in each of its six meetings through September 2025, potentially lowering the deposit facility rate to 1.5%.
Geopolitical and Economic Uncertainty
The ECB’s decisions are being shaped by a highly uncertain global backdrop, including the policies of U.S. President-elect Donald Trump. Trump’s threats of sweeping trade tariffs and tax cuts could have far-reaching consequences for the eurozone economy, as key sectors face increased competition for investment funds. Carsten Brzeski, global head of macro research at ING, highlighted the potential ripple effects of Trump’s policies, which may significantly impact Germany and France — the eurozone’s largest economies.
“Under Trump, the U.S. is set to cannibalize the flow of funds into crucial sectors by cutting taxes, deregulating, and attracting investment from Europe,” Brzeski said. He warned that this could be more damaging to the eurozone than tariffs themselves, exacerbating existing economic challenges.
2025 Outlook: Risks and Opportunities
Despite the headwinds, some economists see potential for upside surprises in 2025. Real income growth and increased savings among consumers could provide a delayed boost to the eurozone economy. Southern European nations, in particular, are expected to benefit from a continued post-pandemic tourism boom, mitigating some of the broader economic pressures.
However, Brzeski also raised the possibility of a “bold downside scenario,” where Europe adopts its own protectionist measures in response to U.S. policies. Such a move could plunge global trade into a full-blown trade war, further straining the eurozone’s fragile recovery.
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