According to minutes from their Dec 11-12 meeting, European Central Bank (ECB) policymakers agreed that while a cautious and gradual approach to cutting interest rates was necessary, further easing was likely due to weakening price pressures. The ECB hinted at a potential rate reduction as inflation could reach 2% by mid-year, although the timing and magnitude of cuts were still subject to discussion.
Despite uncertainties, all policymakers supported a 25 basis point cut, with considerations for a larger reduction briefly entertained. However, the focus shifted from inflation concerns towards addressing sluggish economic growth, with some policymakers advocating for rates to be lowered sufficiently to foster economic expansion.
The ECB discussed the need for more indicators to confirm the defeat of inflation before committing to specific rate adjustments, leading to the removal of references to maintaining rates at a "restrictive" level without introducing new guidance. While a faction favored a 50 basis point cut to counter weak growth projections, structural challenges were noted, highlighting the limitations of monetary policy in addressing them.
Regarding the concept of the neutral interest rate, policymakers acknowledged the lack of precise measurement, with estimates ranging between 1.75% and 3%. The ECB emphasized the need for a gradual approach to assess when policy rates would reach a broadly neutral level, considering the varying estimates and complexities involved.
Looking ahead, investors anticipate another 25 basis point cut in the ECB's 3.00% deposit rate during the upcoming Jan 30 meeting, with expectations of further decreases to reach 2% by the end of 2025.