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The European Central Bank is set to hold its final policy meeting of 2024 on Thursday, with expectations of a fourth interest rate cut for the year. Investors will be closely monitoring for insights into future monetary policy decisions.
Market forecasts anticipate a quarter percentage point reduction in the ECB’s key deposit rate to 3 percent next week, with some speculation of a larger half-point cut. Further projections suggest five additional quarter-point cuts in the coming year, bringing the deposit rate down to 1.75 percent, according to LSEG data.
If realized, the rate cut next week would mark the lowest borrowing costs since March 2023. Morgan Stanley economist Jens Eisenschmidt believes there may be discussions on the possibility of a deeper cut, considering the prevailing downside risks to growth. Eisenschmidt also suggests that the ECB may aim to convey an expectation of continued rate cuts until reaching a neutral level.
Expectations are high for a shift in the ECB’s language regarding the restrictiveness of monetary policy in the accompanying statement. Barclays economist Mariano Cena predicts a softer tone on restriction, stopping short of an immediate move to a neutral stance.
The ECB will also release updated forecasts for GDP growth and inflation, including a first outlook for 2027. Analysts project a downward revision in growth outlook while anticipating inflation to reach the ECB’s 2 percent target sooner than previously expected in the next year.
Impact of Inflation on Fed Rate Cut Prospects
Amid speculations of a US interest rate cut later this month, next week’s inflation data will play a crucial role in determining the Federal Reserve’s decision. Forecasts indicate a rise in annual consumer price inflation to 2.7 percent in November, with core inflation expected to remain steady at 3.3 percent.
Strong job creation data fueled expectations of a quarter-point rate cut on December 18, although concerns remain regarding the pace of rate reductions. Inflation figures above expectations could prompt a reassessment by Fed officials.
BNP Paribas economists caution that a fourth consecutive month of 0.3 percent core price increases, as anticipated, may not instill confidence in the Fed’s efforts to curb inflation. Any deviation from expectations could complicate the decision-making process for further rate cuts.
RBA’s Stance on Interest Rates
While Australian interest rates are expected to remain unchanged at the upcoming meeting, market participants are keen on signals that a growth slowdown could prompt action from the Reserve Bank of Australia (RBA) in the near future.
Weaker-than-expected quarter-on-quarter growth figures have intensified calls for a policy rate cut, leading to a depreciation of the Australian dollar against the US dollar. Traders foresee potential rate cuts starting in April, with multiple reductions anticipated by the end of next year.
Despite the sluggish economic performance, Capital Economics’ Abhijit Surya notes that solid retail sales and the RBA’s stance on inflation may delay any dovish shift in policy. The RBA has indicated that a significant decline in inflation would be necessary to warrant a reduction in the cash rate.