The European Central Bank is set to cut interest rates by 25 basis points this week? Deutsche Bank: If inflation continues to weaken, a 50 basis point cut may occur in early 2025

This week, the direction of the European Central Bank's monetary policy has once again become the focus of the market.

At 21:15 Beijing time on Thursday, the European Central Bank will announce its December interest rate decision, followed by a monetary policy press conference by President Christine Lagarde at 21:45. So far this year, the European Central Bank has cut interest rates three times, gradually lowering the deposit facility rate to 3.25%.

In the face of the bleak economic outlook for the Eurozone and a weak euro, the market generally expects the European Central Bank to cut rates by 25 basis points. Goldman Sachs stated that, based on the weak economic outlook for the Eurozone, inflation below expectations, and recent statements from the Governing Council, this possibility is quite high. With the Eurozone's economic growth weakening and inflation gradually receding, the European Central Bank may enter a more moderate monetary policy cycle.

Deutsche Bank expects that the European Central Bank will continue to cut rates as planned until 2025, targeting a rate of 1.50%, and will consider larger cuts in the event of economic weakness.

Goldman Sachs: The European Central Bank will cut rates by 25 basis points, gradually easing to 1.75% by July 2024

The Goldman Sachs team led by Sven Jari Stehn released a report on the 8th, predicting that given the sluggish growth and inflation approaching the target, the likelihood of the European Central Bank cutting rates by 25 basis points (rather than 50 basis points) is very high.

This expectation is primarily based on the recent bleak outlook for European economic growth. Goldman Sachs believes that although the Eurozone's GDP unexpectedly grew by 0.4% in the third quarter, mainly driven by the Paris Olympics, this does not indicate a comprehensive economic recovery. The economic growth rate is expected to slow to 0.2% in the fourth quarter.

Secondly, the labor market still shows some resilience. Employment grew by 0.2% quarter-on-quarter in the third quarter, and the unemployment rate remained at a historical low of 6.3%. Goldman Sachs predicts that the labor market will cool down in the future, but there will not be a significant deterioration in the short term.

The slowdown in inflation is an important basis for the European Central Bank to adjust its policy. Data shows that core inflation and overall inflation in the Eurozone in the third quarter were both below expectations, with core inflation falling to 2.8%. Goldman Sachs expects that by 2025, core inflation will decline to the target level of 2%. However, inflation in the service sector remains high, reflecting that the impact of labor costs has not completely dissipated.

In addition, Goldman Sachs expects the European Central Bank to lower its inflation forecast for 2025, but to keep its forecasts for 2026 and 2027 unchanged at 1.9% and 2%, respectively. Despite the easing of inflationary pressures, a weak euro and rising energy prices may pose some upside risks to future price levels.

Goldman Sachs believes that the recent statements from several officials of the European Central Bank highlight the importance of a "gradual policy approach." At the December meeting, the European Central Bank may continue to adhere to a "data-driven" and "gradual adjustment" policy tone, emphasizing that each meeting's decisions are based on the latest data without pre-committing to future interest rate paths.

Furthermore, the European Central Bank may adjust the wording in its policy statement from "maintaining sufficiently restrictive" to "appropriate restrictive" to release a more moderate policy signal. Goldman Sachs believes that this adjustment may help achieve a policy consensus within the committee Overall, Goldman Sachs stated that its interest rate cut cycle will continue into 2025, gradually lowering by 25 basis points each time, reaching a level of 1.75% by July 2025. This rate is slightly below Goldman Sachs' estimated neutral interest rate range (2%-2.5%). However, Goldman Sachs also pointed out that considering the downside risks to economic growth, the future rate cuts may be larger.

Deutsche Bank: Expects a 25 basis point rate cut in December, but will consider larger cuts in the face of economic weakness

In a research report on the 9th, Deutsche Bank also believes that the European Central Bank will cut rates by 25 basis points at its December meeting.

Analyst Michael Kirker noted that although some members are concerned that the inflation target may not be met (such as Villeroy and Centeno), other members (like Holzmann) believe such concerns are unnecessary. Regarding a 50 basis point rate cut, some members expressed opposition from mid-November to the end of the month, unless economic conditions significantly deteriorate.

Kirker expects the ECB to continue cutting rates until June, followed by further cuts of 25 basis points in September and December, bringing the rate to 1.5%. If service sector inflation continues to weaken as expected, the ECB may cut rates by 50 basis points in early 2025.

The research report pointed out that there is currently a divergence of opinions among committee members regarding the impact of U.S. tariffs on inflation. Nagel believes that tariffs may raise inflation, but overall, most committee members consider the impact to be uncertain. Lagarde stated that tariffs may cause slight inflation in the short term, but the long-term effects could be both inflationary and deflationary.

According to Deutsche Bank's medium-term forecast, the real GDP growth rate in the Eurozone for 2024 is expected to be 0.7%, increasing to 0.8% by 2025. The inflation rate is expected to be 2.4% in 2024 and drop to 1.9% in 2025. The core inflation rate is projected to be 2.9% in 2024 and decrease to 2.2% in 2025.