Will ECB interest rates start to fall as early as March next year?

The eyes of the European financial sector will be focused on Frankfurt this week, where the European Central Bank (ECB) will hold a meeting on Thursday, after which it should be at least a little clearer whether we can expect a decline in key interest rates next year, currently raised to the highest level since the euro’s inception. Inflation in the eurozone has significantly weakened – in November it fell to 2.4 percent and is getting closer to the targeted two percent that the ECB desires – while on the other hand, the European economy is edging closer to a (mild) recession. In this context, financiers no longer believe the previous messages from the ECB that interest rates will remain at current levels for an extended period of time.

According to Reuters, which conducted a survey among European financial analysts, governors will very likely express satisfaction with the current level of inflation, which, let us remember, was over 10 percent just a year ago. As expected by Jens Eisenschmidt, former chief economist of the ECB and now chief economic analyst at the European branch of the American investment bank Morgan Stanley, a clearer message about future interest rate hikes is likely to be sent on Thursday, from which the market could conclude that the peak has been reached.

However, analysts agree that we should not expect President Christine Lagarde to be more than mildly accommodating towards easing monetary policy. Raphael Gallardo, chief economist at Carmignac, believes that the current inflation situation is more favorable than the ECB previously assessed. However, with the upcoming expiration of energy subsidies in most eurozone member states, inflation could flare up again, alongside the continued rise in wages. Therefore, economists do not expect the ECB to declare victory over inflation just yet.

Regarding interest rates, the European financial sector expects the ECB to reduce the cost of money by 130 basis points over the next year, with the first cut expected as early as March. This is significantly more optimistic than at the end of October, when financiers believed that interest rates would decrease by 70 basis points in 2024, with the first cut only in July. However, a good portion of economists believes it would be premature for the first reduction to occur in early spring.

As for the refreshed ECB projections, economists expect the ECB to lower its projections for economic growth and inflation rates for 2024, compared to the September projections. This will be of particular interest to analysts as it will for the first time include projections for 2026, in which the inflation rate could finally reach the desired two percent.