European Central Bank Maintains Steady Easing, Swiss National Bank Accelerates

Summary

• The European Central Bank (ECB) lowered its Deposit Rate by 25 bps to 3.00% at today’s monetary policy announcement, and the accompanying statement was noticeably dovish in tone. In particular, the ECB’s medium-term forecasts for underlying inflation were slightly below the 2% target, and the central bank removed its pledge to keep policy rates “sufficiently restrictive for as long as necessary” to return inflation to target.
• Overall, we view today’s announcement as consistent with and supportive of our outlook for continued steady rate cuts from the European Central Bank. Our base case remains for 25 bps rate cuts in January, March, April and June, with a final 25 bps rate cut in September, for a terminal ECB policy rate of 1.75%. The announcement opens the door to a possible 50 bps rate cut during early 2025 if Eurozone growth and inflation were to prove especially weak.
• The Swiss National Bank (SNB) surprised market participants by delivering a 50 bps reduction in its policy rate to 0.50%, citing a decrease in underlying inflation pressures. Given the outlook for further ECB easing and the potential for upward pressure on the franc, we expect the Swiss National Bank to cut rates again by 25 bps to 0.25% in March.

European Central Bank Cuts Rates, Offers Dovish Guidance

The European Central Bank (ECB) lowered its Deposit Rate by 25 bps to 3.00% at today’s monetary policy announcement, an outcome that was widely expected, and the ECB’s accompanying statement was noticeably dovish in tone. Overall, we view today’s dovish announcement as supporting our outlook for the ECB to cut rates at every meeting through June of next year, while also opening the door to a possible 50 bps rate cut during early 2025 if Eurozone growth and inflation were to prove especially weak.

Among the key elements of today’s ECB statement:

• The disinflation process is seen as well on track, and the central bank removed its reference to an expected rise of inflation in the coming months.
• Domestic inflation has edged down but remains high, with wages and prices still adjusting to the past inflation surge with a substantial delay.
• The central bank lowered its projections for underlying inflation (CPI excluding food and energy) slightly. The ECB now sees underlying inflation at 2.9% in 2024 and 2.3% in 2025 (both unchanged), 1.9% in 2026 (previously 2.0%) and 1.9% in 2027.
• The ECB also lowered its GDP growth projections to 0.7% for 2024 (previously 0.8%), 1.1% for 2025 (previously 1.3%) and 1.3% for 2026 (previously 1.5%).

Perhaps most importantly, the ECB removed its reference to keeping “policy rates sufficiently restrictive for as long as necessary” to return inflation to its 2% medium-term target. Instead, the ECB simply said it “will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance” and that it is “not pre-committing to a particular rate path.” That change in language represents a clearly dovish shift by ECB policymakers.

Overall, we view today’s announcement as consistent with and supportive of our outlook for continued steady rate cuts from the European Central Bank. Our base case remains for 25 bps rate cuts in January, March, April and June, with a final 25 bps rate cut in September, for a terminal ECB policy rate of 1.75%. While we are not inclined to adjust that outlook at this time, we do view the ECB’s slightly below-target medium-term inflation forecasts and removal of its pledge to keep monetary sufficiently restrictive as increasing the risk of a larger 50 bps rate cut some time in early 2025. Indeed, ECB President Lagarde said there was some discussion of a 50 bps rate cut at today’s meeting, although the overall agreement was that a 25 bps rate cut was the right move.

If sentiment surveys soften further, economic growth is especially weak, or inflation especially benign, that could see policymakers opt for a larger rate cut at some point. ECB President Lagarde once again indicated that growth risks are tilted to the downside, and our own forecast for Eurozone GDP growth of 0.9% in 2025 is slightly below the ECB’s projection. In terms in timing, we would view the risk of a 50 bps rate cut as more likely at the March rather than January monetary policy meeting. The March meeting will include fully updated economic projections, and give policymakers a chance to see a couple more inflation readings than the January announcement. as well as at least some early indications on fourth quarter wage developments.

Swiss National Bank Surprises With Aggressive Easing

Ahead of today’s ECB decision, the Swiss National Bank (SNB) surprised market participants by delivering a 50 bps reduction in its policy rate to 0.50%, compared to the 25 bps reduction expected by the consensus. The SNB also said it remains willing to be active in the foreign exchange market as necessary.

In lowering interest rates, the central bank noted a decrease in underlying inflation pressures. With lower-than-expected food and energy inflation as well, the SNB lowered its CPI inflation projection for 2025 to 0.3% (previously 0.6%), while its inflation forecast for 2026 was little changed at 0.8% (previously 0.7%). Given the outlook for further ECB easing, and the potential for upward pressure on the Swiss franc, we expect the Swiss National Bank to cut rates by 25 bps to 0.25% in March. While further easing beyond that is possible, we view the central bank as hesitant, just yet, to return its policy rate to the zero interest rate threshold.