December ECB: Cuts Rates by 25bps, Removes Hawkish Bias

The European Central Bank (ECB) delivered a 25-basis point rate cut, bringing its deposit rate down to 3%, while removing the hawkish bias from its statement. This marks the ECB's fourth rate cut since June, although it did not pre-commit to a specific rate path.

Key Changes:

• The ECB has removed references to ‘restrictive policy’ and ‘inflation returning to target’. In the previous meeting, the ECB emphasized keeping policy rates "sufficiently restrictive," but this phrase was omitted in yesterday’s statement.

• The ECB has slightly revised its forecasts downward for GDP growth and inflation:

Policy Stance

The ECB repeated its commitment to a data-dependent approach, avoiding pre-committing to any specific rate path. The inflation outlook, core inflation, and transmission mechanisms will define the future rate path. High uncertainty remains regarding both the growth and inflation outlooks.

ECB President Christine Lagarde mentioned that there was some discussion about a 50bps rate cut. However, on the issue of potential tariffs by the incoming U.S. President Trump, Lagarde noted that these had not yet been factored into the ECB's projections. Service inflation also remains a concern for the ECB.

In a growing trend of post-meeting insights, ECB sources revealed that a few policymakers initially favored a 50-basis point rate cut, with some arguing that the ECB may be overestimating growth. These policymakers suggested that growth could fall below 1% next year if Trump’s tariffs are enacted. Despite these concerns, there is little appetite for rushing policy decisions given the current uncertainty.

Key Take Aways

Overall, the ECB’s latest move reflects a cautious yet flexible approach, as it navigates through uncertain economic conditions. With inflation still a concern and external risks like U.S. tariffs on the horizon, future policy adjustments will remain highly data dependent.