According to Zhitong Finance APP, as inflation eases, the European Central Bank may cut interest rates again next week, and financial markets are eager to understand whether a more challenging environment will prompt the ECB to accelerate its rate-cutting pace.
Since the ECB's monetary policy meeting in October, Donald Trump's victory in the U.S. election has increased tariff risks for Europe, while France and Germany are struggling to cope with political turmoil, deteriorating business activity, and a plummeting euro.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, stated, &#34;It makes no sense to take a hawkish stance now.&#34;
Here are five key questions that the market is focusing on:
1. Will the ECB cut rates by 25 basis points or 50 basis points in December?
Traders believe that a 25 basis point cut is more likely. This would be the ECB's fourth rate cut this year.
The sharp slowdown in business activity in November has fueled rumors of a significant rate cut in December, and ECB Governing Council member and Bank of France Governor Francois Villeroy de Galhau stated that the ECB should keep the option for a larger rate cut open.
However, due to last month's rebound in inflation and the ongoing uncertainty surrounding U.S. tariff policies, most rate setters seem to support a moderate rate hike. Meanwhile, other economic data is more optimistic: the ECB's latest bank lending data shows that demand for housing loans has reached a record high.
Carsten Brzeski, global head of macro at ING, said, &#34;We expect a 25 basis point cut rather than a 50 basis point cut, as hawkish officials point out that core inflation is high and inflation rose again in November.&#34;
The ECB is expected to cut rates again.
<img src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20241206/1733491646954159.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="image.png" original-src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20241206/1733491646954159.png"/>
2. What impact do Trump's tariffs have on ECB policy?
It is currently unclear. Tariffs are seen as detrimental to economic growth, but their impact on inflation is more uncertain. Currently, the focus is on the shock to economic growth.
Trump has promised to impose a 10% tariff on imports from all countries, but details have yet to be announced.
ECB President Christine Lagarde stated that, overall, the trade war will have a &#34;net negative impact on everyone,&#34; not just the countries targeted by U.S. tariffs.
Goldman Sachs expects that tariffs on Europe will be more limited, predicting a 0.5% hit to Eurozone output.
Reinhard Cluse, chief European economist at UBS, stated, &#34;The negative impact on Eurozone GDP may be more severe than the impact on inflation.&#34; He added that if trade tensions escalate, the ECB may implement more easing policies.
The economic outlook for the Eurozone is deteriorating.
<img src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20241206/1733491696426128.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="image.png" original-src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20241206/1733491696426128.png"/>
3. Will the European Central Bank accelerate the pace of interest rate cuts?
Yes, especially if the economic slowdown further pressures inflation.
The money market expects the European Central Bank to cut interest rates by about 155 basis points by the end of 2025, up from 120 basis points a month ago. This reduction would bring the European Central Bank's benchmark interest rate below the neutral range of 2%-2.5% that economists consider neither stimulative nor restrictive for the economy.
Bruno Cavalier, Chief Economist at ODDO BHF, stated: &#34;The Eurozone needs policies that are more supportive than neutral (interest rates).&#34;
Traders increase bets on European Central Bank interest rate cuts
<img src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20241206/1733491795465403.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="image.png" original-src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20241206/1733491795465403.png"/>
4. What is the inflation situation?
Consumer price inflation accelerated in November, with the most closely watched indicators remaining high, indicating that the European Central Bank is cautious about cutting interest rates.
Inflation seems to still be moving towards the 2% target, with signs that wage pressures are easing.
Société Générale stated that the European Central Bank may lower its forecasts for economic growth and overall inflation next year.
The European Central Bank's latest forecasts may show that inflation will reach the target in the first half of next year, compared to the September forecast of the end of 2025.
Eurozone inflation gradually approaches the European Central Bank's target
<img src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20241206/1733491831662973.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="image.png" original-src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20241206/1733491831662973.png"/>
5. Will the European Central Bank intervene to support French bonds?
Not at the moment.
The Transmission Protection Instrument (TPI) allows the European Central Bank to purchase bonds from Eurozone member states that are subject to unfounded sell-offs. However, France does not meet the requirements for using the TPI.
Due to speculation about interest rate cuts, France's borrowing costs have already decreased, and other markets remain stable.
Nevertheless, the European Central Bank may face pressure from France. France is experiencing its second major political crisis in six months, and the risk premium of French bonds relative to German bonds has reached its highest level since 2012.
Ducrozet from Pictet Wealth Management stated: &#34;The European Central Bank absolutely has no reason to intervene in French bonds right now, as it will not spread to other countries.&#34;
French bond risk premium jumps to the highest level since 2012
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The European Central Bank may cut interest rates again next week, with the market focusing on five key issues, including the extent of the rate cut and the impact of Trump's tariffs on policy. Analysts expect a higher likelihood of a 25 basis point cut due to rising inflation and optimistic economic data. The impact of Trump's tariff policy on economic growth remains unclear, but it is expected to have some negative effect on output in the Eurozone

- The European Central Bank (ECB) is expected to consider another interest rate cut next week as inflation declines, with market speculation on the extent of the cut.  
- Key issues include the potential for a 25 or 50 basis point reduction, the impact of U.S. tariffs on the Eurozone economy, and the ECB's cautious stance on inflation despite recent pressures.  
- The ECB may face pressure to intervene in the French bond market due to rising risk premiums, but currently sees no need for action as France navigates political instability.

Zhitong

UBS Group AG

Société Générale

YIWU CCC

Multiple bearish factors "suddenly attack" the European Central Bank, market focuses on five key issues