With the European Central Bank’s September monetary policy meeting now over, we can start to analyze the aftermath of the meeting and the message from ECB President Christine Lagarde at the press conference. The president avoided giving any clues about the path the ECB will take after its rate cut on Thursday, but this is undoubtedly the big question that remains. When will the next rate cut be? How many cuts will take place in the coming months? Markets are anticipating more aggressive cuts than analysts are predicting: For investors, over the next seven meetings there will be six rate cuts of 25 basis points. Analysts, for their part, expect there to be only three, one for each quarter.
The ECB began this rate-cutting cycle relatively calmly. In June, it lowered rates, then waited until its July meeting, not moving, and in September it repeated the move of early summer. This is the strategy that analysts believe the agency will continue next year, with rates cut every quarter.
Many major analyst houses are moving in this direction. BlackRock, Pimco, T. Rowe, Goldman Sachs… The forecasts for a cut every quarter are piling up, and they consider that the ECB will take advantage of the meetings in which it must update the macroeconomic forecast table to lower rates again. That is, December, March and June of next year, a roadmap that promises only 75 basis points of cuts until the August 2025 holidays.
Barring any surprises in the macroeconomic outlook, BlackRock is clear that this will be the scenario that Lagarde and the ECB Governing Council will follow in the coming months. “We expect the ECB to move slowly, at least until it can confirm that inflation has returned to the 2% target in the second half of 2025 and wage growth has moderated,” says Ann-Katrin Petersen, chief investment strategist for Germany, Austria, Switzerland and Eastern Europe at the BlackRock Investment Institute. “We believe the ECB will limit itself to one rate cut each quarter,” Petersen confirmsand stresses that “only a rapid economic deterioration would force them to proceed with rate cuts at consecutive meetings, or with deeper cuts of 25 basis points,” he emphasizes.
This is a scenario very similar to that indicated by Tomasz Wieladek, chief economist at T. Rowe Price, who had anticipated before the meeting that “a pace of quarterly cuts remains the most likely outcome”, and confirmed that Lagarde would continue “depending on the evolution of the situation” data and forecasts, which would lead her to continue to be cautious.
From Pimco, Konstantin Veit points in the same direction and underlines the importance of updates to the macro forecast table, since he hopes that it will be at meetings where the ECB feels confident enough to lower the price of silver. “Given the ECB’s reaction function, we expect it to continue to cut rates at meetings where it presents its macroeconomic projections.and we expect the next rate cut in December,” Veit says.
Markets expect more aggressive cuts
DWS, Creand, MUFG, Berembeg, Goldman… all these companies are already pointing to a new downward movement by the ECB in December, but this is a scenario that the market does not share for the moment: investors do not believe that the banking center will show this restraint. Today, The market has priced in a much more aggressive rate reduction process.
For starters, investors have bought into the fact that the ECB will cut rates in October and again in December, and expect the deposit facility (the European Central Bank’s benchmark rate for now) to bid farewell to 2024 at 3%, 50 basis points below current levels.
In 2025, the ECB will not slow down according to the market and will proceed with a wave of rate cuts stronger than what analysts are pointing out. Investors have forecast that, from January to July, there will be 100 basis points of cuts, which will have to be added to the 50 basis points of October and December 2024.
“We expect the next rate cut to occur in December, with a pause in October, which is a tighter monetary policy scenario than the market is anticipating,” said Salman Ahmed, global head of macro and capital allocation at Fidelity, confirming the gap that has opened up between market and analyst outlooks.
