What to expect from the ECB in its first meeting of the year?
Updated:
29 JAN, 2025
By Jose Luis Palmer from RankiaPro Europe
The first ECB meeting of 2025 will take place on Thursday January the 30th. Market consensus expects the European Central Bank's Governing Council to cut interest rates by 25 basis points to 2.75%, unlike the Federal Reserve's expected pause today. Any other movement would come as a surprise to financial markets.
Below, you can find out the opinion of international fund managers on what they expect to happen at Thursday's ECB meeting.
Additional protection and manageable inflation
Konstantin Veit, Portfolio Manager at PIMCO
We believe that the ECB will cut the deposit facility rate by 25 basis points at its January meeting, from 3% to 2.75%. Despite persistently high domestic inflation, weak growth and the inflation outlook for this year support a policy rate closer to neutral.
From a risk management perspective, with rates at 2.75%, any upside inflation shocks can be addressed with a slower pace of rate cuts, while lowering rates provides additional protection against downside risks.
Since December, the ECB has shifted its focus from maintaining a sufficiently restrictive policy to implementing an appropriate policy. As a result, the debate within the Governing Council (GC) regarding the appropriate neutral policy rate has gained momentum.
Given the uncertainty surrounding the neutral rate range and still-elevated domestic inflation—largely driven by persistent price pressures in the services sector—we believe it is likely that policy rates will continue to decline gradually.
Markets are pricing in a policy rate of around 2%, broadly in line with our estimates of a neutral rate for the euro area. However, we see additional downside risks to euro area growth following the US elections and the possibility that terminal rates may be lower than currently expected.
The balance of macroeconomic risks appears to have shifted from concerns about high inflation to worries about weak growth, with the ECB’s projection of a steady 0.3% quarter-on-quarter growth rate for each quarter of 2025 increasingly looking like an upper limit.
We expect the ECB to continue emphasising that decisions will be made on a meeting-by-meeting basis, with the data flow over the coming months determining the pace and scale of monetary easing in future meetings.
Further rate cuts expected
Ulrike Kastens, Senior Economist for Europe at DWS
Since the last ECB meeting in December, the data situation in the euro area has not changed significantly. Economic indicators continue to point to rather weak growth in the coming months. And, as expected, the inflation rate continued to rise at the end of 2024. At the same time, however, inflation projections also show increasing confidence that the rise in the cost of living will approach the inflation target, on a sustained basis. Unlike the US Federal Reserve, this environment allows the ECB to cut the deposit rate by another 25 basis points to 2.75%. We expect no change in monetary policy communication: the focus will remain on data dependence, which makes sense given the high political and trade uncertainty. Further rate cuts are expected. Opinions within the ECB remain divided on lower policy rates. However, we see the achievement of a neutral interest rate level as an important intermediate target and expect the deposit rate to be at 2% by June 2025.
Do not rule out four cuts in 2025
Vis Nayar, Chief Investment Officer & Ray Farris, Chief Economist; Eastspring Investments
ECB President Lagarde is likely to try to maintain guidance for gradual cuts because of firmer than desired December inflation data. Yet, data this week are likely to show French GDP stagnated in Q4 while German GDP contracted.
Additionally, consensus estimates for Stoxx 600 earnings have
begun falling from their mid-January high. We expect three
25bps cuts from the ECB this year and do not rule out four.
Risks biased towards a more aggressive orientation
Daniel Loughney, Director, Head of Fixed Income at MIFL
Given that ECB President Lagarde has recently commented that the disinflationary process continues and that inflation will be on target by 2025, the ECB is likely to at least corroborate market expectations of a further 75 basis point cut this year, bringing the target rate to 2%.
We see risks skewed towards a more hawkish stance, given recent weak data from core Europe, particularly Germany.
25-point cut to continue the path to eventually reach 1.5%
Hugo Le Damany & François Cabau, Economist at AXA Investment Managers
We expect the ECB Governing Council to cut interest rates by 25 basis points for the fourth consecutive time, bringing them down to 2.75%, as widely anticipated. Both hard and soft activity data have remained moderate since the December meeting. However, as expected, headline inflation surged at the end of 2024, following the positive base effect of energy prices. The average price of a barrel of oil has risen by approximately 13% in euros since the cut-off date of the ECB’s latest projections. However, in our view, this is not enough to derail the ECB’s rate cut.
In an interview earlier this month, ECB Executive Board member Philip Lane highlighted the risk of keeping interest rates too high, as it could lead to a failure to meet the inflation target, justifying the decision not to pause rate cuts in the January meeting. On the opposite end of the spectrum within the Governing Council, Bundesbank President Joachim Nagel reportedly stated that "there is a certain probability that the ECB will cut rates next week".
Even after a reduction to 2.75%, the ECB’s deposit rate would still remain (slightly) above the neutral rate range—the level that neither stimulates nor restricts economic activity—which Lagarde referenced in December as being between 2.50% and 1.75%. We do not expect any change in communication. In December, the Governing Council adjusted its forward guidance to maintain “official interest rates at sufficiently restrictive levels for as long as necessary” to sustainably stabilise inflation at the target level. This stance should remain unchanged until further data is available, as well as policy developments in the US and the evolving political landscape in Germany and France. All of this warrants a cautious and gradual approach from the ECB.
Furthermore, a broad consensus has emerged within the Governing Council (Villeroy, Nagel) that a deposit rate of 2% could be reached by summer, aligning with both market expectations and our own. Therefore, we believe the ECB is likely to overlook, for now, the recent rise in energy prices.
Challenges in Long-Term Financing Costs / Impact of Quantitative Tightening (QT)
The sell-off in long-term rates has been a key feature of early 2025, despite the recent rebound. ECB President Lagarde may face questions regarding the path of QT, as it is significantly driving up net issuance by member states, although this has been absorbed well so far. We do not anticipate any imminent changes to QT.
Perhaps more interestingly, she is likely to be asked about the impact of these long-term moves, their counterproductive nature in relation to ECB policy direction, now that the ECB is shifting towards an "appropriate policy stance" rather than a merely restrictive one, and whether this could prompt the ECB to ease policy further.
Our Baseline Scenario: Continuous Cuts Until June, Reaching 1.5% by Year-End
We maintain our baseline view of continued rate cuts until June, with the policy rate reaching 2% and further declining to 1.5% by the end of the year. Our base case forecasts only moderate growth improvement this year, driven by private consumption. A sustained acceleration in 2025 will require an investment recovery, which we believe will be primarily supported by the expected rate cuts.
While next week’s decision is likely to be straightforward, the ECB is expected to face much tougher challenges by spring, as early as March, as we approach the neutral rate. Incoming data will be crucial in determining whether landing within the neutral range (2%) will be sufficient or whether a more decisive adjustment will be necessary—which remains our baseline scenario.
