All Insights

Currently reading

Will the ECB cut four times before summer?

Investment Insights • Macro Flash Note

2 min read

Will the ECB cut four times before summer?

In a recent interview on Bloomberg* , Banque de France Governor Villeroy de Galhau spoke in favour of rapid interest rate cuts by the European Central Bank (ECB). He said that the ECB should cut rates by 0.25% in the next four meetings to reach 2%, which he viewed as the neutral rate, by summer.

Stefan Gerlach
Stefan Gerlach

He noted that the ECB had successfully lowered inflation, which had fallen from more than 10% two years ago to 2.4% in December. The Governing Council expected an average harmonised index of consumer prices (HICP) inflation rate of 2.1% in 2025, which would be very close to its target.

While this is of course merely his view, he is arguably the most influential national central bank governor on the Governing Council and there is no doubt that his views will carry considerable weight.  

He is quite right to stress the sharp fall in eurozone inflation. Monthly inflation rates in the second half of 2024 have indeed been compatible with price stability. The average monthly rate of headline inflation was 0.17%; for services it was 0.25%; and for core inflation it was 0.18%.1  If sustained, that implies that headline and core inflation would reach 2.1%, and service inflation 3.0%, by January 2026. 
 

Table 1. Inflation rates

ECB1.png

Source: EFG calculation on data from ECB. Data as at 23 January 2025.

Since the base effects are known until December 2025, if the monthly inflation rates remain at these levels in 2025, we can project how annual inflation will evolve during 2025. The graph shows a rapid decline in headline inflation by spring, and in both service and core inflation by summer.  

Chart 1. Inflation projections

ECB2.png

Source: EFG calculation on data from ECB. Data as at 23 January 2025.

A further reason to expect disinflation is signalled by the ECB’s new wage tracker, which uses granular data from collective bargaining agreements from seven eurozone economies (including the four largest: Germany, France, Italy and Spain) to analyse wage pressures. While future wages are unknown, collective bargaining agreements are forward looking, permitting an analysis of likely future wage increases. 

The wage tracker shows that wage growth is likely to fall from 5.3% in 2024Q4 to 1.4% in 2025Q4. Since the members of the Governing Council often emphasise the importance of lowering wage growth, it will likely attach considerable importance to this information. 
 

Chart 2. ECB wage tracker

ECB3.png

Source: ECB. Data as of 23 January 2025.

Overall, with monthly inflation rates having stayed at levels compatible with price stability in the second half of 2024, and with wage agreements signalling falling wage pressures, it is not surprising that members of the Governing Council are growing increasingly confident that interest rates can be cut repeatedly in the coming months. Financial markets are pricing in 1% of cuts during 2025. Most of those cuts could plausibly take place in the first half of the year.

Required

Required

Required

Required

Required

Required

Required

Required

Please note you can manage your subscriptions by visiting the Preferences link in the emails you receive from us.

Required