The ECB removed one piece of language in its statement, leaving the door open for continued rate cuts. Traders kept their rate expectations steady.
On Thursday, the ECB cut its deposit facility rate by 25 basis points to 3.00% at its final policy meeting of 2024, in line with market expectations; this was its fourth rate cut of the year, a cumulative cut of 100 basis points, which brought the benchmark rate down to its lowest level since March 2023. The central bank also plans to stop reinvesting in its emergency anti-epidemic bond purchase program (PEPP) at the end of 2024.
After the ECB announced its interest rate resolution, the euro briefly rose 15 pips against the U.S. dollar before falling back again.
In its statement, the ECB removed the reference to interest rates remaining “sufficiently restrictive”, hinted at the possibility of further cuts and warned that economic growth would be weaker than its previous forecasts. The central bank expects GDP growth of 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027. (September’s expectations were 0.8%, 1.3%, and 1.5%, respectively).
Meanwhile, the ECB believes that the anti-inflationary process is progressing well. The central bank expects inflation to be 2.4% in 2024, 2.1% in 2025 and 1.9% in 2026. (September expectations were 2.5%, 2.2%, and 1.9%, respectively); core inflation is projected at 2.9% in 2024, 2.3% in 2025, and 1.9% in 2026. (September expectations were 2.8%, 2.3%, and 2.0%, respectively);
In terms of policy guidance, the ECB did not pre-commit to a specific interest rate path and said it would follow a data-dependent and meeting-by-meeting approach to determine the appropriate monetary policy stance.
Traders’ expectations for the ECB’s interest rate remained stable following the rate resolution announcement, with a 127 bps cut expected in 2025.
FX strategist Vassilis said in a quick review of the ECB’s resolution that the euro fell to a new low because the ECB dropped the “restrictive policy” part of its statement, but this does not mean that the policy language is outright dovish. Eurozone bonds were moderate.
