They’re cutting rates. Everybody’s cutting rates.
On Thursday, at its final policy meeting of 2024, the ECB lowered the depo rate to 3%, as widely expected. It was the fourth cut of the cycle.
Although headline inflation in Europe ran 2.3% in November — so, slightly above target — the uptick was down to base effects, and while core price growth’s loitering at 2.7% — more than slightly above target — officials are far more concerned at this juncture about the growth outlook, which is touch and go as evidenced by lackluster PMIs, among other data points.
I’ll recycle some familiar language. Notwithstanding a decent read on bloc-wide growth for Q3, nothing’s changed structurally about the European economy. It’s a famously apathetic beast, which is to say there’s exactly no reason for anyone to expect lively growth. Indeed, the updated staff forecasts which accompanied Thursday’s ECB decision found the outlook revised lower to reflect 0.7% GDP growth this year and 1.1% in 2025, down from 0.8% and 1.3% previously.
“Staff now expect a slower economic recovery,” the statement said, adding that the strength and durability of the growth impulse, such as it is in Europe, “rests mainly on rising real incomes – which should allow households to consume more.” “Over time,” the bank went on, “the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand.” Fingers crossed.
The updated inflation forecasts suggest headline and core price growth will be 2.1% and 2.3% in 2025, respectively. The bank’s economists reckon both will slip below 2% in 2026.
With Thursday’s move, the ECB has delivered 100bps of cuts in six months, and there’s more where that came from. The forward guidance no longer includes a reference to keeping policy “sufficiently restrictive,” which suggests the bank’s pondering a move below neutral — so outright stimulative policy settings.
The outlook’s uncertain, to put it nicely. It’s very likely that Europe will find itself caught up in episodic trade spats with the US, and there are the usual concerns about Donald Trump’s commitment to NATO. At the same time, the French political scene’s fraught, Germany too. The Germans will figure it out. The French… I’m less confident there.
The ECB’s fourth cut of 2024 came on a day when the SNB slashed rates by 50bps and a day after the Bank of Canada likewise cut by half a point.
With the SNB, it’s always about the franc. Thursday’s move was no exception. The currency was trading very strong against the beleaguered euro (see the figure below), and that risked too much disinflation for the Swiss. This was Martin Schlegel’s first policy meeting since replacing Thomas Jordan.
It’s very difficult to keep a lid on franc strength in a tumultuous world where havens are in demand, and when the European economy can’t get out of its own way.
By definition, the SNB’s outsized cut reduces the policy maneuvering space, but the hope is that by going big, the bank can forestall the need to cut rates further. Color me skeptical. The franc may look less attractive for now, but it’ll get its glow right back just as soon as there’s another geopolitical escalation, or on the next underwhelming European growth read-out.
With today’s move, the policy rate in Switzerland’s just 0.5%. My guess is they’ll back at the lower-bound sooner or later, and they’ll be intervening to weaken the currency too. “Nobody likes negative rates,” Schlegel told Bloomberg Thursday. “Of course, we would also be ready to implement negative interest rates again if necessary.”
Yes, “of course.”
