The European Central Bank will trim 25 basis points (bps) from its deposit rate on Dec. 12, according to all but two of 75 economists polled by Reuters, and at least 100 bps more next year as the economy slows and fears mount about U.S. tariffs.
For now, the ECB is unlikely to react to heightened political turmoil in Europe – the French government collapsed as expected on Wednesday.
U.S. President-elect Donald Trump’s proposed tariffs, and whether they trigger a wider trade war, raise further questions for ECB policy next year.
Most ECB watchers have kept their rate views, including end-2025 forecasts, unchanged from a survey taken last month, as they await further developments before making big changes.
All 75 economists barring two in the Dec. 2-5 Reuters poll predicted another 25 bps cut next week, the fourth such move this year. The other two expected a 50 bps cut.
“A 25 bps move remains our baseline, and comments from most Governing Council members appear to back such a step as well. Even in the case of a 25 bps cut, the big uncertainties involved in the outlook will likely keep the overall message rather soft and open-minded,” said Jan von Gerich, chief analyst at Nordea.
“Trump’s capability to increase uncertainty in the euro area is large…(and) the fact both Germany and France lack a strong government with a lot of political influence makes it very challenging for Europe to make rapid and well-defined decisions.”
There had been some speculation in markets recently about a larger half-point move, but comments from ECB officials suggest that is unlikely.
“As the data currently stands, I think a reduction of 0.25 percentage points is conceivable, not more,” Robert Holzmann, one of the most hawkish Governing Council members, said earlier this week.
An 80% majority of respondents, 60 of 75, predicted two more deposit rate cuts next quarter, a bigger majority than around 70% in November. Just over half, 39, predicted another two quarter-point reductions in the second quarter, taking the rate to 2.00%.
An over 75% majority of economists expected rates at 2.00% or lower by end-2025, up from about 70% in November and around 60% in October, suggesting risks are skewed towards more cuts than fewer.
Interest rate futures are pricing in over 150 bps of ECB rate reductions by end-2025, twice what is priced in for the U.S. Federal Reserve, meaning an already retreating euro could remain weak in the near term, a separate Reuters survey showed.
TRADE THREAT TRUMPS DOMESTIC POLITICS
An overwhelming majority of the same panel of economists surveyed last month said Trump’s tariffs would significantly affect Europe’s economy in coming years.
“We downgraded our growth forecast materially for 2025, as a result of the Trump tariffs. We don’t think Trump is very sympathetic to the EU and will not hold back,” said James Rossiter, head of global macro strategy at TD Securities.
“If you look at the geopolitical risks around the coming year with France, Germany, Trump, all these things really skew to the downside. If you get one of these or multiple of these geopolitical risks materialising in a big way, then it’s easy to see a scenario where the ECB has to cut to 1.5%.”
The euro zone economy is forecast to grow 1.0% in 2025 and 1.2% in 2026, poll medians showed, a slight downgrade from last month.
Inflation, at 2.3% in November, is expected to fall back to the 2% target in the second quarter of 2025 and stay around there at least until 2027, according to median poll forecasts.
ECB staff will update their own economic forecasts at the December meeting.
(Reporting by Indradip Ghosh)
