ECB Just Cut Interest Rates. Expect Its Next Moves to Diverge From the Fed. — Barrons.com
2024-12-12
Category: economic

By Brian Swint
The European Central Bank lowered its key rate by a quarter point on Thursday, the same move that the Fed is expected to do next week. But whereas the Fed might start slowing down reductions next year, the ECB is more likely to plow ahead.
The difference is that, while interest rates on both sides of the Atlantic are considered high enough to be constricting the economy, growth in the U.S. has been substantially stronger and the inflation rate is still well above the Fed's target. Growth in Europe is tepid and inflation has been slower than in the States, even if it hasn't yet sustainably hit the ECB's 2% target.
The possibility that President-elect Donald Trump may put tariffs on European exports further darkens the outlook, throwing up new barriers to world trade and denting global expansion. On top of that, political crises in France and Germany, the two biggest economies of the 20-nations sharing the euro, have left both countries without functioning governments.
"The disinflation process is well on track," the ECB said in a statement with the decision. "Although growth picked up in the third quarter of this year, survey indicators suggest it has slowed in the current quarter."
The December cut was the fourth quarter-point reduction since June. In fact, there was some debate about whether the ECB would surprise markets with a half-point reduction, bringing the key deposit rate to 2.75% instead of the current 3%. Their peers in Switzerland delivered a bigger-than-expected cut earlier on Thursday. ECB policymakers appeared divided in the run up to the meeting, with some ruling out a bigger move while others say the rate-setting council should consider it.
The ECB reiterated that it is data dependent and isn't "pre-committed to a particular rate path."
Updated forecasts from the central bank's staff showed a weaker outlook for than it was in the last forecasts three months ago. It sees growth of 0.7% in 2024, 1.1% in 2025, and 1.4% in 2026. It expects the inflation rate to fall to 2.1% next year and below the 2% target the year after that.
ECB President Christine Lagarde holds a press conference after the decision in Frankfurt. The Fed's decision is due Dec. 18.
Write to Brian Swint at brian.swint@barrons.com
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