The European Central Bank (ECB) is expected to cut interest rates by 25 basis points to 3% during its December 12 meeting, according to UBS analysts. This decision is likely to be influenced by updated macroeconomic projections, which are expected to show inflation reaching the 2% target by early 2025. UBS forecasts that the ECB will continue cutting rates by 25 basis points at subsequent meetings, bringing the deposit rate to a neutral level of 2% by mid-2025.
The bank’s adoption of this gradual approach is based on the assumption that Eurozone labor markets will remain resilient, resulting in slow wage growth. However, this assumption can be challenged if labor markets weaken, wage growth slows, or GDP performance is weaker than expected, requiring the ECB to cut rates faster and below neutral.
The ECB is also set to unveil updated macroeconomic projections, including forecasts for 2027, for the first time. UBS predicts that the 2024 inflation forecast will be revised slightly lower to 2.4%, while the 2026 headline inflation forecast will rise to 2.0%. GDP growth projections are likely to remain subdued, with a modest uptick expected in 2026 due to improved technical assumptions.
The forward guidance from the ECB will also be a key focus of the meeting, with UBS anticipating that the bank will maintain its data-dependent approach but may drop references to keeping rates “sufficiently restrictive,” signaling a shift in tone as inflation trends towards the target. The investment bank also flags potential impacts on bond and currency markets, predicting German 2-year yields to decline further and maintaining a medium-term bearish outlook on the euro, targeting 1.04 by the end of 2025. However, they suggest fading any near-term EUR rebounds toward 1.07, citing vulnerability to US policy shifts under the incoming Trump administration.