ECB Insight: ECB Still on Track for 25BP Cut Next Week, Barring Forecast Shock

4 December 2024

By David Barwick and Marta Vilar – FRANKFURT (Econostream) – Although one large investment bank recently saw fit to change its call for the European Central Bank Governing Council’s 12 December monetary policy meeting from 25bp to 50bp, at Econostream we see little reason to doubt our expectation that the smaller option will prevail next week.

In conversation after conversation, Council members have been clear about their preferences and reasoning, so clear that we are left wondering how anyone could arrive at another conclusion.

Monetary authorities’ public comments having consistently pointed in the direction of 25bp, unless one thinks the ECB has engineered an elaborate ruse to deceive media, financial markets and the public at large, only one explanation makes sense to us.

Namely, one has to assume that the newest macroeconomic projections will warrant a larger move, presumably by showing 2% reached very early in the year and significant undershooting thereafter, all in the context of weak growth.

This is absolutely possible, and Econostream naturally yields to professional forecasters when it comes to predicting how the ECB will update its expectation of prospects for growth and inflation.

We are limited to relying on what policymakers tell us, and many of them, in particular those at smaller national central banks, are awaiting the new projections just as keenly as anyone else.

Still, we like to think that they have some inkling of what’s in store, and as one governor told us this week when we specifically asked whether he saw room for an unexpected decision based on the forecasts, ‘It would be a big surprise if the projections surprised us’.

We also like to look for clues in public comments at the level of the ECB’s Executive Board, whose members observe the revised forecasts gradually taking shape over a period of time and thus have a better idea sooner of where things are headed.

In remarks published one week ago, Isabel Schnabel ruled out a recession and saw neither signs of an abrupt worsening of labour markets nor a significant risk of undershooting on inflation.

And in the podcast aired just two days ago, Chief Economist Philip Lane, closer than anyone else to the projection exercise, said that the forecasts ‘continue to see for next year, the year after and so on, a recovery dynamic in the euro area.’

None of this lends much credence to the idea that unexpectedly dismal new projections would underpin a sudden shift in favour of a rate cut of a size with which most Council members are clearly uncomfortable today.

The governor mentioned earlier, who said of supporting a cut larger than 25bp that he ‘cannot imagine it for the moment’, surmised that if the ECB were to move by 50bp in December, it could then wind up in January either doing nothing or at most cutting by 25bp.

Such an erratic approach would leave observers thinking that the ECB had moved too fast or wondering what new information it might be keeping to itself, he reasoned. In the end, a 50bp cut in December thus risked ‘raising all sorts of questions, which would not be at all helpful’, he said.

Another governor who spoke to Econostream recently said he didn’t ‘see any reason why you would speed up’ the easing process by taking larger steps, because doing so ‘would mean that there is something unusual’, but there isn’t.

Moreover, there was ‘still quite a bit of uncertainty’, and this would remain the case until the March forecast exercise, he said. This uncertainty called for ‘small steps’, and this reasoning was ‘the logic for the time being’, he said.

Yet another governor, one who expressly dismissed the option of a 50bp cut as standing no chance, said that such a move would indicate concern that developments didn’t warrant in the first place. Things were ‘going according to plan’, he insisted, and that justified no more than 25bp.

We could go on, but in the end, the most we would be willing to say about a 50bp cut is that it is probably likelier than no cut at all, though not moving remains an option, as we have noted previously and as the first governor mentioned above pointedly observed.

In the waning hours before the onset of the quiet period, we don’t expect any of the remaining ECB speakers to highlight the option of no move any more than they will endorse 50bp.

While ECB President Christine Lagarde may play her cards close to her chest as usual this afternoon (perhaps she will laud the virtue of gradualism), we would not be surprised if comments by one of the national central bank governors yet to speak suggested, perhaps explicitly, that a 25bp cut would be reasonable and appropriate.