The European Central Bank (ECB) has lowered interest rates to 3% following its latest meeting earlier today (12 December).
The 25 basis points cut was in line with market expectations, and represents the fourth interest rate cut on the continent this year.
Meanwhile, the central bank has lowered both its inflation and growth outlook for the coming years.
The ECB sees headline inflation averaging 2.1% in 2025, down from 2.3%, while the eurozone economy is expected to grow by 1.1% in 2025 – revised down from 1.3%.
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Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management, said: “Following today’s 0.25% cut, we expect the ECB to continue its easing cycle until the policy rate reaches a point below neutral.
“European inflation trends continue to improve and growth momentum has stalled in the face of uncertainty on global trade.
“In spite of reducing rates the ECB is likely to continue shrinking the size of its balance sheet against a backdrop of increased fiscal issuance, this may continue to put pressure on government bond spreads.”
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, said the main good news for investors comes in the form of the lowered forecasts for inflation.
“That will come as a relief, as there was concern that the sharp depreciation in the euro could push inflation a bit higher than previously pencilled in,” she added.
“On the negative side, GDP growth forecasts were revised down over the same period, while 2027 growth is projected to be muted as well.
“The combination of weaker growth and disinflation allows the ECB to drop “restrictive” policy guidance. In 2025, the ECB is likely to ease policy at a faster pace compared to the US and the UK due to its struggling economy and headwinds from potential tariffs.”
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With European interest rates now at 3% – 150bps below the Fed Funds Rate – Candriam CIO Nicolas Forest expects monetary policy divergence to continue to widen in 2025.
“While the quantitative tightening of the ECB will bring extra pressure on the issuance program of eurozone sovereigns, the central bank could decide to increase the increment of rate cuts from 25 bps to 50 bps if the economic outlook deteriorates further,” he said.
“The monetary policy divergence between the US and Europe is expected to continue to widen further in 2025 and we maintain a preference for European rates vs US ones in terms of duration.”
