December will cut interest rates by 50 basis points?

• News
• 2024-07-09

As the European Central Bank's (ECB) 2% inflation target looms near, ECB officials are beginning to diverge in their views on the direction of monetary policy. While some dovish officials openly discuss the necessity of further rate cuts, their hawkish colleagues urge caution. Although hawkish officials also emphasize that restrictive policies should not be maintained longer than necessary, they insist that the fight against intensifying price pressures is not yet won.

Last week, the ECB conducted its third rate cut this year, lowering the main deposit rate to 3.25%. Economists and traders anticipate more rate cuts in the coming months. On Wednesday, media reported that the ECB began discussing whether rates should be lowered below neutral levels to stimulate the economy, leading to a market repricing. The overall inflation rate in the Eurozone has already fallen below the 2% target, and Germany, once an economic powerhouse, is now in recession.

This week, traders increased their bets that the ECB will cut rates by 50 basis points in December to boost the Eurozone's weak economy. The swap market suggests a 45% likelihood of a 50 basis point rate cut at the ECB's last meeting of the year and expects a 25 basis point cut at each meeting before June next year. Prior to the ECB's decision to cut rates by 25 basis points last week, the market only anticipated a 25 basis point cut in December.

ECB Officials' Comments

Some ECB policymakers have hinted in recent days that they may be open to accelerating the pace of easing; however, some officials still emphasize the need for caution. At this week's International Monetary Fund (IMF) annual meeting, several ECB officials made comments.

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ECB President Christine Lagarde said, "I believe that for me, the direction forward is clear. I think the measures we have taken since June are sensible and should continue with prudence. The policy direction is clear, but the pace is determined based on backward and forward-looking factors."

ECB Chief Economist Philip Lane said, "There is a high degree of confidence that the disinflationary process is on track, but at the same time, we expect unemployment to remain low, consumption to grow, and investment to recover. Although some recent data have raised questions about growth forecasts, the economies of the 20 member countries do not show signs of 'sharp weakness.'"

German Bundesbank President Joachim Nagel said, "Discussions about 25 basis points or other different topics, I think this is ultimately unhelpful. We live in a very uncertain environment, so we must wait for new data before we must make decisions."

Banque de France Governor François Villeroy de Galhau said, "We are not behind the curve today, but flexibility should prevent us from taking such risks in the future. The risk of reducing our restrictive stance too late is indeed likely to become greater than the risk of acting too quickly. If our inflation rate remains at 2% next year, and the economic growth prospects for Europe remain sluggish, there is no reason to maintain a restrictive monetary policy, no reason for our rates to be above neutral rates. When the victory against inflation is in sight, monetary policy should not impose excessive or long-term restrictions on economic activity and employment, thereby affecting our fellow citizens."

Bank of Italy Governor Ignazio Visco said, "The coexistence of low inflation and weak economic growth clearly favors us further easing monetary policy. Given that the ECB is likely to reach the 2% inflation target 'much earlier' than its September forecast of the end of 2025, the direction of interest rates is clear, and the necessity of reducing borrowing costs below neutral levels cannot be ruled out."Bank of Spain Governor Escriba said: "The upside and downside risks to the inflation outlook are roughly balanced. Service inflation is declining, but it still exists and there is a certain degree of stickiness."

Dutch Central Bank Governor Knot said: "I cannot rule out any possibilities, but in my view, we need to see a considerable deterioration in the outlook before we have to worry about the risk of structurally insufficient action. Of course, this could affect the speed at which we return interest rates to neutral. In this case, it could accelerate this pace."

Austrian Central Bank Governor Holzmann said: "I think there might be a 25 basis point rate hike in December. Further rate cuts of 50 basis points are not impossible, but unlikely. However, we might also conclude that the preemptive rate cut in October could be enough to give the economy some breathing space in December. I am still concerned that inflation could be more severe than expected. Of course, there are also downside risks - although I do not see enough downside risks to conclude that they are dominant. I believe that in the ECB's Governing Council, the view倾向于downside risks remains a minority opinion."

Bank of Finland Governor Rehn said: "The eurozone's disinflation is on the right track. In the past few months, the economic growth outlook has weakened significantly, which could also increase disinflationary pressures. We must pay attention - perhaps also focus on - the possibility of inflation being lower than expected. At least for now, I am not that worried because service inflation and wage inflation are clearly close to our 2% target. The danger of insufficient action has not yet been confirmed."

Bank of Slovakia Governor Kazimir said: "Our decision to cut rates in October leaves a lot of room for the December meeting. All options are on the table. I am increasingly convinced that the foundation of the disinflation path is solid. But I still need to see further evidence that inflation can sustainably return to the target."

Bank of Portugal Governor Centeno said: "We do not need to restrict ourselves to indicators that only move in increments of 25 basis points. For an economy with an average inflation rate of 0.9% over the past decade, for an economy that does not invest, for an economy supported by a labor market showing some signs of weakness, we need to consider the possibility of taking more significant measures. We have been delaying the recovery, and downside risks are becoming a reality. This could be a good definition of falling behind the curve."

Bank of Lithuania Governor Simkus said: "The direction is clear - reducing restrictive monetary policy. I do not yet know what the decision will be in December. But the direction is clear - rate cuts."

Central Bank of Cyprus Governor Pasaris said: "If inflation does not rise unexpectedly, then we can and should continue to lower interest rates. December is an important month because more data will be available, including new forecasts. In this way, we can better assess our position. The risks to economic growth are clearly downside. But due to potential supply shocks, rising oil prices, and trade wars, it is not clear whether the inflation path will tilt in the same direction. Inflation risks are more or less balanced, and we should not ignore the upside risks."