How fast will the ECB lower interest rates?

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The European Central Bank holds its final policy meeting of 2024 on Thursday and is widely expected to deliver its fourth interest rate cut of the year, so investors will be looking for clues about what comes next.

Markets expect the ECB to lower its key deposit rate by a quarter percentage point to 3 per cent next week, although swaps are pricing in an outside chance of a larger half-point cut.

Investors then expect five more quarter-point cuts next year that will bring down the deposit rate to 1.75 per cent, LSEG data shows.

A cut next week would bring borrowing costs down to their lowest level since March 2023.

“We also expect a discussion on the merits of a deeper cut,” said Morgan Stanley economist Jens Eisenschmidt, given growth risks were “pointing to the downside”. “We think that the [ECB] will want to find a way to express the expectation that rates can be cut until a neutral level is reached,” added Eisenschmidt.

Investors will be closely watching the statement that accompanies the ECB decision, with many observers expecting the central bank to abandon its mantra that monetary policy will remain “sufficiently restrictive for as long as necessary” to achieve price stability.

“We expect a softer tone on restrictiveness,” said Barclays economist Mariano Cena in a note to clients, adding that he expected that the ECB would stop short of “signalling an immediate move to a neutral stance”.

The ECB will also unveil its updated predictions for GDP growth and inflation, including a first forecast for 2027. Analysts anticipate that the growth outlook will be lowered while inflation will be sustainably hitting the ECB’s 2 per cent target earlier than previously thought next year. Olaf Storbeck

Will inflation support Fed rate cut bets?

With hopes high for a US interest rate cut later this month, next week’s inflation data serve as the one remaining potential stumbling block to a third successive reduction from the Federal Reserve.

Annual consumer price inflation in November is expected to have risen to 2.7 per cent from 2.6 per cent the previous month, according to forecasts compiled by Reuters. Core inflation, which removes volatile food and energy prices, is expected to be steady at 3.3 per cent.

Bets on a quarter-point cut on December 18 grew last week after data showed strong job creation — but not at a pace that would necessarily deter Fed officials from lowering rates to between 4.25 and 4.5 per cent from their current range of 4.5 to 4.75 per cent.

Inflation above forecasts could cause a rethink among Fed officials.

On Friday, following the employment figures, Fed governor Michelle Bowman warned that progress on reducing inflation had stalled and that cutting rates too quickly risked reigniting price pressures. She added that the looming inflation report would help in her decision on rates.

BNP Paribas economists said a fourth straight month of 0.3 per cent month-on-month rises in core prices, in line with expectations, was “unlikely to inspire confidence” that inflation was still falling. Even a figure of 0.2 per cent “would not be encouraging to a [Fed] already uneasy about delivering further rate cuts”, they added. Jennifer Hughes

Will the RBA give any dovish hints?

Investors think Australian interest rates are likely to stay on hold at Tuesday’s meeting, but they are watching for signs that a growth slowdown will spur the Reserve Bank of Australia into action next year.

Finance minister Jim Chalmers described this week’s 0.3 per cent quarter-on-quarter growth figures as “very weak”. The number has added to pressures on the RBA to cut its policy rate, which it has held at the current level since November last year.

In response, traders moved forward their expectations of when the central bank would begin to lower rates, pushing the Australian dollar down to a four-month low of $0.64 against the US dollar. This continued a run of weakness for the currency, which had already fallen victim to so-called “Trump trade” bets that the country’s economy would struggle in a renewed trade war.

Levels implied by trading in swaps markets suggest that the first quarter-point cut will come in April, one of roughly three cuts expected by investors by the end of next year.

“It is certainly the case that the Australian economy is showing few signs of life,” said Abhijit Surya, Australia and New Zealand economist at Capital Economics. But the downside surprise “doesn’t guarantee a dovish tilt from the RBA”, he added.

He cited “solid” retail sales and the bank’s statement last month that inflation, which remains within its 2 to 3 per cent target range, would have to lower “significantly” to warrant a reduction in the cash rate. Ian Smith

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