On December 16, 2024, the European Central Bank (ECB) cut its key deposit rate by a quarter point to 3%, marking its fourth consecutive cut this year and a total reduction of 100 basis points since June 2024. ECB President Christine Lagarde emphasized that the eurozone economy is 'losing momentum' amid rising uncertainty from both EU and US political landscapes [f1613aaa]. This decision comes as the eurozone faces increasing inflation pressures, with annual inflation rising to 2.3% in November from 2.0% in October [db1d33ba].
The ECB's recent rate cuts reflect growing concerns over weakening economic growth, exacerbated by potential impacts from U.S. trade policies under President-elect Donald Trump, who will take office on January 20, 2025 [8ef58aa1]. In light of these developments, the ECB revised its growth forecasts for 2024 to 0.7%, down from previous estimates, while adjusting inflation estimates to 2.4% for 2024 and 2.1% for 2025 [f1613aaa].
Major financial institutions, including Bank of America, Goldman Sachs, and Citigroup, anticipate that the ECB will cut interest rates by another 25 basis points at its first meeting of 2025 on January 30, 2025, with further cuts expected throughout the year [6ec8d27d]. Money market traders predict eurozone rates could drop to around 1.85% by the end of 2025 from the current 3% [6ec8d27d].
Political instability in Germany and France has further complicated the economic outlook. The resignation of French Prime Minister Michel Barnier on December 5, 2024, and the breakup of Germany's governing coalition in November 2024 have heightened uncertainty in the region [8ef58aa1]. Major companies, including Bosch and Ford, have announced significant job cuts, contributing to a decline in business confidence, as indicated by the S&P Global purchasing managers' index, which recently fell to 48.3, signaling economic contraction [c152e519].
In the United States, annual inflation increased to 2.7% in November from 2.6% in October, while core inflation remained steady at 3.3% [db1d33ba]. The Federal Reserve is expected to announce its third rate cut of 2024 in response to these inflation trends. Meanwhile, China's Politburo has pledged to relax monetary policy for the first time in 14 years amid its own economic downturn [db1d33ba].
As the ECB navigates these turbulent times, its decision to adjust interest rates is seen as a necessary measure to foster economic recovery while addressing both domestic and international risks [c152e519]. The interplay between political events and economic indicators will be crucial in shaping the future of the eurozone's financial stability. The ECB forecasts inflation to reach 2.1% in 2025 and 1.9% in 2026, aligning with its 2% target, as it aims to stabilize the economy amidst these challenges [6ec8d27d].