The December monetary policy meeting is also an opportunity for the ECB to review its macroeconomic scenario. The European institution has thus revised downwards its growth forecasts for the eurozone, both for this year (-0.1% to 0.7%) and for the next two years (respectively -0.2% and -0.1% to 1.1% and 1.4%). The latest activity indicators still show a contraction in activity in the manufacturing sector and a slowdown in services, despite the strength of the tourism sector which helped to boost growth in the third quarter. Overall, the eurozone is suffering from the lack of competitiveness of its industry which is preventing a sustainable rebound in growth. Rising wages and the resilience of the job market should nevertheless help to support consumption. Thus, while the ECB is still counting on a recovery in growth, it is slower than expected and the risks remain tilted to the downside. On the inflation side, however, the speech is intended to be more reassuring. Without yet acknowledging the mission as accomplished, the Governing Council considers that "inflation is on track to reach" the 2% target. Above all, while fears persisted about the impacts of wage tensions, the ECB is now certain that companies no longer have the pricing power necessary to increase their sales prices, which would create a "price-wage" loop, and must therefore resolve to impact their margin.
Less inflation and little growth: the die is cast. The ECB is therefore opting for a more dovish turn by acknowledging that a restrictive monetary policy is no longer necessary (i.e. the following key phrase has been removed from the final press release: "the Governing Council will keep key rates at a sufficiently restrictive level, for as long as necessary, to achieve this objective"). Concretely, this means that the ECB will bring its key rates back to the neutral rate, estimated on average at 2%. Having already lowered the deposit rate four times by 25 bps since June (including last week's meeting) to bring it to 3%, the ECB should therefore continue at this pace at least until next June (four meetings between now and then).
And yet... Despite this change, Christine Lagarde remained very (too) cautious and even slowed down investors' expectations of rate cuts that were too rapid, insisting on repeating the same phrases: no predetermined path, the ECB remains "data dependent". While the door seemed open, a 50 bps cut was ruled out, and reserved for emergency situations. To please everyone, however, a 25 bps cut at the next two meetings would already be a done deal. The ECB President also insisted on the lack of visibility for next year. However, while it is true that the consequences of Donald Trump’s program on inflation are still uncertain, the prospect of a trade war is unlikely to be very beneficial for growth, as are the political problems inherent in the eurozone. Between inflation and growth, the ECB has therefore made its choice, for the moment.
