The European Central Bank is expected to cut key rates again on Thursday, but the size of the cut is debated as the economy slows and political turmoil in France and Germany worries.
With inflation approaching what the ECB wants, 2%, and growth not taking off, “all the reasons” argue for another rate cut in December, declared Bank of France governor François Villeroy de Galhau.
He was joined by other monetary officials in the eurozone. The decision will be announced at noon after a meeting of the monetary institution’s governing body in Frankfurt.
Despite a slight increase to 2.3% year on year in November,inflation in the euro area is still well below the forecast of 2.6% for the fourth quarter established by the ECB.
The most likely scenario is that the rate will be reduced by 0.25 percentage points, like the previous ones, which brings the deposit rate, which refers, to 3%.
But a drop of 0.5 points could be considered if the monetary institute’s new economic projections, published on Thursday, show “a sharp decline in growth and a rapid fall in inflation”, estimates Eric Dor, director of economic studies at IESEG.
if it comes to fruition, the fourth rate cut by the ECB as June will increase the tipping point taken after a period of monetary tightening in the face of high inflation, linked to the war in Ukraine and the post-Covid recovery.
Political crises
Political turmoil across the eurozone’s two main economies, Germany and France, is also likely to boost growth.
While waiting for a successor to the post of Prime Minister after the fall of Barnier’s government, economically weakened France is currently without a budget for 2025, with a public deficit slipping this year to 6.2% of GDP.
German Finance Minister Jörg Kukies, however, was positive, emphasizing the “very calm” reaction of the markets.
If French borrowing conditions deteriorated too much, the ECB could act symbolically through its Transmission Protection Instrument, by buying debt back on the market, to prevent any contagion to other countries.
Germany is also in the middle of a period of uncertainty. In addition to the industrial crisis it is indeed going through, it is heading towards early elections in February, after the collapse of the coalition government of the Social Democratic Chancellor Olaf Scholz in October.
Delays in forming a future government in berlin would further complicate the recovery of Europe’s largest economy,weakened by a two-year industrial slowdown that is already affecting its partners.
New communication
In the United States,inflation accelerated in November,to 2.7% at an annual rate, raising fears that the curve would remain this way. Enough to make the task of the Central Bank of America (Fed) that meets next week more complicated.
ECB President Christine Lagarde is expected to explain on Thursday that “recent data strengthens confidence that inflation will move towards the 2% target in a lasting way”, expects Holger Schmieding, economist at Berenberg.
Uncertainty is high consequently of the ECB in recent months setting its course based on data and meeting by meeting.
Though, with the normalization of inflation, his communication could be more “prospective” again, according to the governor of the Bank of France.
Which means that instead of saying that rates will remain “restricted as long as necessary” to bring inflation back to target, looser wording in today’s policy statement would “pave the way for further cuts” ‘next year’, according to HSBC.
What factors influence the European Central Bank’s decision-making process regarding rate cuts?
Interview Between Time.news Editor and ECB Expert
Editor: Welcome to Time.news, where we dive deep into the latest economic developments. Today, we’re joined by Dr.Elena Richter, a renowned economist and expert in monetary policy, to discuss the expected rate cuts from the European Central bank. Dr.Richter, thank you for being here.
Dr. Richter: Thank you for having me. It’s a pleasure to engage in such an critically important discussion.
Editor: Let’s dive right in. The European Central Bank is anticipated to cut key rates again this Thursday.What are the main reasons driving this decision?
Dr. Richter: The ECB is faced with a slowing economy across the Eurozone. There are various factors at play, including lowered consumer spending and a decline in business investment. With inflation stabilizing but still above the target range, the ECB feels compelled to support growth while maintaining price stability.
Editor: Interesting balance! But there’s talk about the size of the cut being up for debate. What are the different perspectives on this?
Dr. Richter: Absolutely. Some analysts argue for a significant cut to stimulate the economy more robustly, considering the current economic slowdown.However, others are wary of making too aggressive a move, citing potential long-term effects on inflation and financial stability. They prefer a more measured approach, possibly suggesting a smaller cut to assess the impact before committing to further reductions.
Editor: That makes sense. In your opinion, what are the potential consequences of a more meaningful rate cut?
Dr. Richter: A substantial cut could indeed provide an immediate boost to economic activity—lower borrowing costs can spur investment and consumer spending. However, it may also risk reigniting inflationary pressures or creating asset bubbles due to excessively cheap money. there’s also the concern of diminishing returns; markets may start to expect these cuts and react less vigorously over time.
editor: What do you think the ECB should prioritize right now: supporting economic growth or controlling inflation?
dr. Richter: Its a delicate balance. While supporting economic growth is essential, the ECB cannot lose sight of its primary mandate—price stability. The key is to be responsive to economic data. If growth remains sluggish for a prolonged period, a more aggressive stance might be warranted, but it’s crucial to remain vigilant about inflation trends and global economic conditions.
Editor: How do you see other economic factors, like geopolitical tensions or energy prices, influencing the ECB’s decision?
Dr. Richter: Geopolitical tensions, particularly in energy supply and fluctuations in energy prices, have significant implications for inflation and economic stability. The ECB needs to account for these external pressures when making policy decisions. A sudden spike in energy prices, for example, could undermine any benefits from rate cuts, complicating the central bank’s mission.
Editor: With that in mind, what should we keep an eye on in the coming weeks after the ECB’s decision?
Dr. Richter: Watch for the ECB’s forward guidance on future rate adjustments and any signals regarding long-term economic forecasts.Market reactions to the announcement will also provide insights into investor sentiment and confidence in the ECB’s strategy. Additionally, keep an ear out for how other central banks around the world respond, as their actions can influence decisions made here in Europe.
Editor: Dr. Richter, thank you for your insights. It’s clear that the upcoming decisions by the ECB will have far-reaching implications for the economy.
Dr. Richter: Thank you for having me. It’s crucial to keep the dialog going as we navigate these complex economic challenges together.
Editor: And thank you to our audience for tuning in. Stay informed with Time.news for the latest updates on economic developments in Europe and beyond.
