Get Ready for Major Moves: ECB’s Week Outlook for Investors

The upcoming European Central Bank (ECB) meeting on December 12 is generating significant anticipation among analysts, particularly with expectations of a 25 basis point interest rate cut to 3%. UBS analysts have shed light on key factors influencing this decision and the potential trajectory of the Eurozone economy. Here’s a fresh take on their insights:

• The decision to cut interest rates is likely to be driven by updated macroeconomic projections indicating a path towards achieving the 2% inflation target by early 2025.
• UBS envisions a series of rate cuts following the December meeting, with reductions expected in January, March, April, and June to bring the deposit rate down to 2% by mid-2025.
• The gradual rate adjustment is grounded in the belief that Eurozone labor markets will remain sturdy, resulting in a slow decline in wage growth. However, UBS acknowledges the need for readiness to accelerate rate cuts if economic indicators deviate from expectations significantly.
• The ECB is poised to release fresh macroeconomic projections, offering insights into inflation forecasts up to 2027. UBS predicts a marginal decrease in the 2024 inflation forecast to 2.4%, while the 2026 projection is set to rise to 2.0%. GDP growth expectations are expected to stay muted, with a slight improvement in 2026 due to technical factors.
• The updated forward guidance from the ECB is a key focus for the upcoming meeting. UBS anticipates a nuanced shift in tone, potentially moving away from keeping rates “sufficiently restrictive” as inflation moves towards the target, while maintaining a data-dependent approach.
• UBS also points towards potential impacts on bond and currency markets, projecting further declines in German 2-year yields and a bearish outlook on the euro in the medium term, setting a target at 1.04 by the end of 2025. They advise caution against short-term euro rebounds due to potential vulnerabilities to U.S. policy changes.

As the ECB gears up for its pivotal meeting, market participants are primed for substantial developments with the potential to steer the Eurozone economy in new directions. Stay tuned for the outcomes that could shape the financial landscape in the months ahead.