This week, the European Central Bank (ECB) has once again become a focal point in the financial marketsFollowing a tumultuous year, the bank's decisions will likely have widespread implications for the economic trajectory not just in Europe, but globallyAs the world watches closely, a significant announcement is expected this Thursday evening at 21:15 Beijing time, when the ECB will unveil its interest rate decision for DecemberJust a half hour later, ECB President Christine Lagarde will hold a press conference to elaborate on the bank's monetary policy stance.

Throughout this year, the ECB has made three distinct cuts to its interest rates, gradually reducing the deposit facility rate to 3.25%. The backdrop to these decisions has been an increasingly gloomy outlook for the eurozone’s economy and a declining euro, leading many market participants to anticipate a further 25 basis point reduction in interest rates

Analysts at Goldman Sachs noted that given the weakened economic landscape in the eurozone, inflation consistently falling short of expectations, and remarks made by ECB officials recently, such a rate cut seems very likelyAs growth stagnates and inflation retreats, the ECB might be entering a more nuanced, gentle cycle of monetary policy.

Deutsche Bank echoed this sentiment, expecting the ECB to continue its planned interest rate cuts through 2025, with a target rate of 1.50%. The bank suggests that should economic conditions remain poor, larger reductions could come into play.

Goldman Sachs's team, led by Sven Jari Stehn, projected on December 8 that, against a backdrop of sluggish growth and inflation aligning with target levels, the ECB is more likely to opt for a 25 basis point cut rather than a more drastic 50 basis pointsThis anticipation primarily stems from the recent dim outlook for economic growth across Europe.

Interestingly, even with a surprising 0.4% GDP growth in the eurozone for the third quarter—fuelled by the Paris Olympics—the projection for the fourth quarter is much less optimistic, expecting growth to decelerate to just 0.2%. This indicates that while there are temporary boosts, they do not signify a durable rebound for the European economy.

Another aspect to consider is the labor market, which has shown some resilience despite the broader economic malaise

• Central Bank Returns to Gold Market
• Bitcoin Whales Add $2.1 Billion to Holdings
• A-Shares: The Achilles' Heel of China's Financial Arsenal
• Products or Market: Joyoung's Strategy for Its 30th Year
• Gold Surges Again

There was a 0.2% increase in employment in the third quarter, sustaining a historically low unemployment rate of 6.3%. Goldman Sach's forecasts suggest that while the job market may cool off in the coming months, a significant deterioration isn’t expected imminently.

Changes in inflation rate are a key driver behind any adjustments in ECB policyData shows that both core and overall inflation in the eurozone fell short of expectations in the third quarter, with core inflation now resting at 2.8%. Goldman Sachs estimates that by 2025, core inflation could further decline to the 2% targetNonetheless, inflation within the services sector remains stubbornly high, which reflects lingering pressures from labor costs that have yet to ebb significantly.

Add to this the expectation that the ECB might revise downward its inflation forecasts for 2025 while keeping predictions for 2026 and 2027 steady at 1.9% and 2% respectively

Despite a reduction in inflationary pressure, the weakening euro and surging energy prices might still pose an upside risk to future price levels.

Certainly, many recent statements from various ECB officials emphasize the importance of a "gradual policy approach." At the upcoming December meeting, the ECB is likely to maintain a "data-driven" and "incremental adjustment" framework, suggesting that policy decisions will hinge on the most current data rather than on predetermined future interest rate paths.

Additionally, an adjustment in the phrasing of the ECB's policy statements could occur, shifting from "maintaining adequate restriction" to "appropriate restriction," thus signaling a softer policy stanceSuch changes in language may facilitate greater policy consensus among committee members.

Overall, the current cycle of interest rate reductions may extend through 2025, with a series of incremental cuts of 25 basis points

This would result in a decrease down to 1.75% by mid-2025, which is just below Goldman Sachs's estimate of the neutral interest rate range of between 2% and 2.5%. However, they also caution that due to the downward risks associated with economic growth, a steeper rate cut could emerge.

In a report published on December 9, Deutsche Bank analysts also believe that a 25 basis point cut will be enacted at the December meetingAnalyst Michael Kirker remarked that while some ECB members express concern regarding the possibility of failing to achieve inflation targets, others dismiss such worries as unfoundedSome voices within the council opposed the idea of a 50 basis point cut, expressing resistance to such a drastic move unless significant economic degradation is evident.

Kirker anticipates that the ECB's rate-cutting will continue until June, with additional falls of 25 basis points in September and December, leading the rate to stabilize at 1.5%. If services sector inflation persists in declining as anticipated, we may even see the ECB opt for a 50 basis point cut in early 2025.

This ongoing discussion plays out against the backdrop of uncertainty regarding the impact of American tariffs on inflation