The political crises in Germany and France make it even more necessary to continue the easing of monetary policy
The European Central Bank is expected to proceed with its fourth rate cut this year – and the third in a row since September – next Thursday, December 12.
It is most likely that the ECB deposit rate will be reduced, as it has been the three previous times, by 25 basis points (a quarter of a percentage point) to 3% from 3.25% today. With inflation firming near the 2% target and the Eurozone economy taking a hit in recent months, a rate cut seems the only way to improve the outlook for businesses and households.
The recent political crises in the two largest economies of the Eurozone – Germany and France – make it even more necessary to continue the easing of monetary policy, as the uncertainty they cause negatively affects their course. Tellingly, with the long-looming prospect of a vote against Prime Minister Michel Barnier’s government and the budget in France, business activity in France shrank in November to the lowest level in 10 months, according to S&P’s monthly survey Global. Accordingly, in Germany business activity shrank to a 9-month low.
However, it is not only political uncertainty that is undermining the recovery in the Eurozone. The prospect of a trade war with the US if President-elect Donald Trump sticks to his campaign announcement of 10% to 20% tariffs on European goods is also a serious source of uncertainty, particularly for Germany’s most outward-looking economy. And on top of that there is always the open wound from the wars in Ukraine and the Middle East.
A bigger rate cut next Thursday looks less likely because on the inflation front there is the thorn of increases in the prices of services – ranging from rents and catering to tourism and shopping – which are running steady at an annual rate of about 4% over the last year, much higher than overall inflation.
The general consumer price index in the Eurozone, based on Eurostat’s harmonized index, rose 2.3% in November on a year-on-year basis, compared to an increase of 2% in October and 1.7% in September. However, the increase of the last two months is mainly a result of the base, i.e. the comparison of energy prices with the prices of the fall of 2023 which had decreased significantly compared to the previous months. This had the consequence of limiting the annual decrease in energy prices, while if these are excluded inflation moved to 2.7% in November as in October.
The ECB expects that in 2025 the increases in the prices of services will also decelerate due to a corresponding slowdown in wage increases, with the general index now shaping up sustainably at 2%, which is also its target. Rate cuts will continue into 2025, with markets seeing them cut each session until they reach close to 2%.
