Fitch Anticipates Accelerated Rate Cuts from ECB
According to updated forecasts by Fitch Ratings, the European Central Bank is expected to lower interest rates more quickly than previously anticipated. In a published note, Fitch projected that the ECB would reduce interest rates by a quarter point in March, June, September, and December throughout 2025. The expectation was reiterated that the deposit rate would decline to 2% by the end of 2025 as previously anticipated.
The assessments in Fitch's note are as follows: Fitch Ratings expects the ECB to accelerate the pace of rate cuts compared to its projections in the September Global Economic Outlook report. Nonetheless, it anticipates a total reduction of 200 basis points, with rates reaching 2% by the end of 2025 during the current policy easing cycle that commenced in June.
On October 17, the ECB reduced policy rates by 25 basis points, bringing the deposit rate down to 3.25%. A further 25-basis-point cut is expected at the governing council meeting in December, along with quarterly 25-basis-point reductions throughout 2025 (in March, June, September, and December), totaling a 100-basis-point reduction. However, reflecting still high wages and service price inflation, interest rates are expected to remain in restrictive territory for much of 2025.
Fitch views 2% as a neutral policy rate for the Eurozone and the likely endpoint for rates in this cycle. ECB decisions are based on the inflation outlook in light of incoming data, underlying inflation dynamics, and the strength of monetary policy transmission.
ECB President Christine Lagarde stated last week that disinflation is "on track" and characterized this decision as an example of data dependency. Headline inflation, assisted by falling energy prices, dropped more swiftly than the ECB anticipated to just 1.7% in September. There is an expectation for it to accelerate in the following quarter due to base effects from energy prices. Core inflation has decreased to 2.7%. Service inflation has also begun to cool, falling to 3.9%, with ECB research highlighting the outsized impact of some prices less sensitive to wages (and less responsive to policy).
Though unemployment has not yet risen, labor markets are cooling, and wage pressures are decreasing. It is evident that past monetary tightening continues to impact the economy. The ECB appears concerned that Eurozone economic growth will fall short of September forecasts, creating additional downward pressure on inflation, which is already near the target.