ECB Rate Decision: Will It Be 25bps or 50bps?
Article published on December 12th, 2024 – 9:04AM UK Time
The European Central Bank (ECB) is set to announce its rate decision today at 13:15 GMT, with markets widely expecting a 25bps cut. However, uncertainty lingers over the possibility of a larger 50bps reduction, which has sparked debate among analysts. Current short-term interest rate (STIR) pricing reflects a mere 15% chance of such an aggressive move, and recent commentary from ECB officials suggests a preference for a gradual approach to easing monetary policy.
Eurozone Inflation and Growth Trends
In November, Eurozone inflation rose to 2.3%, slightly above the ECB’s 2% target. However, much of this increase is attributed to base effects from prior energy price fluctuations, meaning underlying inflation pressures remain subdued. Despite inflation concerns, Eurozone GDP growth for Q3 surpassed ECB projections, coming in at 0.9% year-on-year (compared to 0.8% forecasted), and 0.4% quarter-on-quarter (vs. 0.2% expected). Germany’s inflation also saw an uptick, adding complexity to the ECB’s decision-making.
ECB Guidance
Recent remarks from ECB officials signal cautious optimism for a controlled approach. President Christine Lagarde emphasized on December 4th that while the direction of rates is downward, the pace remains undetermined. Other officials, including Holzmann and Rehn, pointed to 25bps as the most likely move, with Vujcic noting that a December rate cut should be a straightforward decision. Nonetheless, the possibility of a more aggressive cut is not entirely off the table, especially if new economic projections show a sharper downturn.
Potential EUR Surprises
- 50bps Rate Cut: While unlikely, a larger-than-expected 50bps cut could signal deeper concerns about the Eurozone’s economic outlook or heightened geopolitical risks, such as the potential for U.S. tariffs under the incoming administration. A 50bps cut would likely spark EUR weakness, with EUR/USD sellers dominating markets.
- Impact of External Pressures: The euro remains under pressure from broader risks, including the threat of U.S. trade tariffs and political instability in Europe, such as bumpy French politics and the possibility of a German snap election in early 2025. These factors, combined with the ECB’s dovish stance, are keeping the euro subdued.
Market Expectations
For now, markets anticipate a 25bps cut, with limited upside for the euro given the challenging macroeconomic backdrop. A larger move would be a significant surprise, given that STIR markets see only a minimal probability of a 50bps cut. If the ECB sticks to 25bps, attention will shift to Lagarde’s press conference for signals on the future pace of rate adjustments.
Key Takeaway
The ECB’s decision today will hinge on balancing inflation trends, GDP performance, and geopolitical risks. A 25bps cut is the most likely outcome, but a surprise 50bps reduction could trigger significant EUR downside, particularly in EUR/USD. With uncertainties looming, the euro is set to remain under pressure in the near term.