The European Central Bank (ECB) policymakers are anticipating further interest rate reductions but remain cautious due to uncertainties that may disrupt the journey towards the 2% inflation target. The minutes from the December 11-12 policy session highlighted these concerns.
In December, under the leadership of President Christine Lagarde, the ECB's Governing Council reduced key interest rates by 25 basis points for the third time, lowering the deposit rate to 3.00%. The council hinted at additional cuts in January, contingent on inflation developments.
Policymakers concurred that a gradual pace for rate reductions aligned with the strategy of passing several "checkpoints" to ensure disinflation stayed on course, allowing for potential adjustments if necessary, as outlined in the ECB's minutes, referred to as the "account."
The minutes emphasized the necessity of this cautious stance due to existing uncertainties and factors that could impede swift inflation reduction to the target level. ECB members agreed on the appropriateness of a gradual easing of policy restrictions, assuming inflation projections hold over the coming months.
In December, the eurozone experienced a third consecutive month of rising inflation, reaching 2.4%, while core inflation remained stable at 2.7%. Despite these figures, the ECB's inclination towards easing is apparent, with some considering a 50-basis point reduction in December amidst the deteriorating growth outlook for the euro area.
However, this suggestion met resistance, as a larger cut might suggest a more pessimistic economic view than warranted, barring additional adverse shocks. The ECB had revised its growth forecasts in December, predicting growth at 1.1% for next year, 1.4% in 2026, and 1.3% in 2027.
The next policy announcement is scheduled for January 30, with expectations leaning towards another quarter-basis point reduction. At 3%, the deposit rate remains restrictive, deemed too high for the eurozone's current fragile economic state, according to ING economist Carsten Brzeski.
Brzeski noted that while the ECB is cautious not to repeat past delays in addressing inflation, the urgency to realign rates to a neutral level is compelling. Should the euro area economy falter beyond December’s projections, rate cuts will become inevitable, as the ECB's forecast indicated a terminal rate below 2%, the economist remarked.
Economic weakness currently dominates ECB policymakers' concerns. Recent data revealed that Germany, the eurozone's leading economy, was mired in recession throughout the previous year. Preliminary fourth-quarter euro area GDP estimates are expected to be released just before the ECB's policy announcement on January 30.
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