The European Central Bank (ECB) is poised to announce its last interest rate cut of the year on December 12. Analysts expect the cuts will be modest, at 25 basis points, down from earlier speculation of a larger 50-basis-point move.
CNBC’s latest report shows the ECB staff will meet this week to unveil its quarterly macroeconomic projections and announce interest rate cuts. Economists predict the pace of monetary easing could accelerate in the coming months.
These forecasts are expected to account for the unpredictable global implications of Donald Trump’s return to the U.S. presidency and his proposed trade tariffs, which could have far-reaching effects on the eurozone.
A year of gradual cuts
Over the course of 2024, the ECB has reduced its key interest rate by 75 basis points, bringing it from 4% in June to 3.25% in October through three consecutive 25-basis-point cuts.
According to reports, Eurozone inflation eased in August to its lowest level in three years, falling to 2.2% from 2.6% in July. The European Central Bank also noted that labor cost pressures were easing, with corporate profits helping to absorb the effects of rising wages on inflation.
However, at the time, the ECB acknowledged that financing conditions remained tight, contributing to subdued private consumption and weak investment across the bloc.
Earlier discussions hinted at the possibility of a more aggressive 50-basis-point reduction to close out the year, particularly given declining inflation and a weakening economic outlook in the euro area. However, recent economic indicators and monetary policy trends have tempered these expectations.
Money markets currently suggest a limited chance of a substantial cut, with pricing on Wednesday reflecting an anticipated 29 basis points in reductions for December. Economists have pointed to rising negotiated wages in November as a cautionary signal, suggesting the ECB may prefer a more measured approach.
Per CNBC, headline inflation in the eurozone ticked up to 2.3% in November from 2% the previous month, marginally exceeding the ECB’s target. Meanwhile, economic growth in the bloc accelerated at its fastest pace in two years during the third quarter, albeit at a modest rate of 0.4%.
Eurozone seeks to balance inflation and growth
Sylvain Broyer, chief EMEA economist at S&P Global Ratings, anticipates a 25-basis-point cut this month, reflecting a cautious stance as inflation remains relatively contained in the short term.
Speaking to CNBC, Broyer emphasized that labor cost increases surpassing productivity growth could compel the ECB to maintain vigilance on inflationary pressures.
“There is no need to hurry up at this stage for the ECB,” Broyer said. “Inflation, at least over the short term, is under control. But as long as labor costs increase above productivity, the ECB should remain on the cautious side, or on the wait-and-see side for cutting rates.”
Broyer predicts a quicker succession of rate reductions in 2025 as the ECB seeks to achieve a neutral monetary policy stance—neither restrictive nor stimulative to growth.
Moreover, revised projections from Bank of America Global Research suggest an accelerated pace of rate cuts next year. The bank now expects the ECB’s deposit facility rate to drop to 1.5% by September 2025, down from an earlier estimate of 2% by mid-year.
“With an economy that will be growing at or below trend for most of 2025, we think it will be hard for the ECB to skip a meeting until the [deposit facility] falls slightly below where it sees the neutral rate (2%), to where we see it (1.5%),” Bank of America strategists wrote in a recently released statement.
Political and geopolitical challenges
The ECB’s decisions are unfolding against a backdrop of political and economic uncertainty, particularly in key economies like Germany and France. Rising bond yields in these countries are compounding the challenges for policymakers.
Carsten Brzeski, global head of macro research at ING, noted that political instability in Europe’s largest economies could create additional headwinds for the eurozone.
Speaking at an event last week, Brzeski pointed out that while Southern European economies are benefiting from a post-pandemic tourism resurgence, Germany and France face potential political gridlock in the first half of 2025.
Compounding these challenges is Trump’s economic agenda in the US, which could divert investment from Europe through tax cuts, deregulation, and other incentives. Brzeski cautioned that such policies might pose a greater threat to the eurozone than the specter of trade tariffs.
“The first half of the year is also going to be a standstill politically in Germany and France,” Brzeski said. “Southern European economies will continue to benefit from a post-pandemic tourism boom, and they don’t need to compete with Chinese manufacturing. But the eurozone faces significant uncertainty regarding external shocks.”
Despite near-term challenges, some analysts see room for optimism. Rising real incomes and savings could provide a delayed boost to eurozone growth, supporting the economy through 2025.
However, Brzeski warned that downside risks exist, including the possibility of Europe implementing its own protectionist measures in reaction to US policy, which may worsen global trade tensions.
