Market participants eye the European Central Bank for potential investment opportunities
European Central Bank Holds Rates as Inflation Outlook Remains Uncertain
The European Central Bank (ECB) has decided to keep interest rates unchanged at their meeting in Frankfurt on Thursday, as expected. The deposit rate, which banks receive for parking excess liquidity at the central bank, will remain at 4%, marking its highest level since the start of the currency union in 1999.
The question is whether the ECB will align with the aggressive market pricing of rate cuts in 2024. According to a recent Reuters poll, 57% of economists expect the ECB to cut rates at least once before their July meeting. However, Marcel Fratzscher, President of the German Institute for Economic Research (DIW), expects inflation to fall below 2.5% only in spring or early summer 2024. The ECB, in its assessment, expects inflation to rise further in the coming months due to base effects.
Fratzscher is uncertain if the ECB will take the first step to lower rates in March, but expects them to wait a bit longer. This cautious stance is likely due to trade uncertainties, especially tensions with the United States, and a strong euro. Inflation is forecasted to dip below the 2% target later in 2025 and remain subdued for around 18 months due to these factors plus falling energy prices.
The strong enough jobs report in the US has pushed back expectations of the first rate cut. In November, more jobs were created in the US than expected, with 199,000 new jobs outside the agriculture sector. Portfolio manager Thomas Altmann of asset manager QC Partners stated that the jobs report is not extremely strong, but it's strong enough to push back expectations of the first rate cut.
Economists at Deutsche Bank are eagerly awaiting ECB President Lagarde's press conference after the rate decision on Thursday. Market pricing shows that investors are betting on a first rate cut as early as March 2024. However, the ECB has adopted a data-dependent, meeting-by-meeting approach rather than committing to a predetermined path for interest rates.
The refinancing rate will remain at 4.5%. The ECB is expected to leave interest rates unchanged at their December meeting, according to interest rate and currency specialists from ING. The expected timeline for European Central Bank rate cuts in 2024 has largely passed, with the ECB initiating a rate-cutting cycle starting in June 2024 and conducting eight cuts over the following year. As of July 2025, the ECB has paused this easing cycle, leaving interest rates unchanged in its July 24 meeting. Market pricing currently anticipates one more rate cut by the end of 2025, most likely in September, with a roughly 50% probability, before possibly shifting back toward tightening in late 2026.
This pause in rate cuts reflects the ECB's assessment that inflation is stable at its 2% medium-term target, supported by easing domestic price pressures and slower wage growth. The ECB's target of 2% inflation is coming increasingly close, according to the latest figures.
[1]: Source 1 [2]: Source 2 [3]: Source 3 (Multiple sources for reference)
- The investors are betting on a first rate cut by the European Central Bank (ECB) as early as March 2024, according to market pricing, but economist Marcel Fratzscher from the German Institute for Economic Research (DIW) expects the ECB to wait a bit longer due to lingering uncertainties and inflation outlook.
- Despite the expected pause in rate cuts, economists at Deutsche Bank and investors are keeping a close eye on the ECB for any signs of future moves in financing and investing, as the ECB continues to navigate the uncertain inflation landscape.
