EU economic outlook for Q4 2024

ECB’s strategic patience with interest rate changes

The European economy remains at a critical stage, shaped by uncertainty and the ongoing recalibration of monetary policy by the European Central Bank.

Heading into the Q4, the eurozone is recovering from the previous economic slowdown exacerbated by high inflation, rising energy costs and global uncertainties, and is trying to find a balance between maintaining fragile growth and managing inflation risks.

While the ECB has already initiated a series of rate cuts, the pace and trajectory of further reductions are subject to debate. Another rate cut in December is most likely if there are no economic setbacks, but policymakers are expected to proceed with caution, emphasizing "strategic patience" as they navigate the path forward.

Inflation, particularly in the service sector, remains a key concern for the ECB. With inflation gradually retreating towards the 2% target, there are still concerns about lingering price pressures. At the same time, the eurozone’s sluggish economic performance increases the risk that inflation will fall below the ECB's target, reflecting pre-pandemic conditions. Also, prolonged high interest rates could push weaker economies in the eurozone to the brink of recession, making the case for easing monetary policy.

ECB expected to cut rates by 25 bps in December

After a series of rate hikes, the ECB decided in June to cut interest rates by 25 basis points for the first time in five years. Another cut followed in September, as inflation numbers were close to ECB’s expectations and the latest forecasts by the bank’s experts confirmed its previous inflation outlook for next years.

The ECB is expected to continue cutting interest rates, but while further cuts are on the horizon, they will be measured and driven by the data. Current market expectations indicate that the next rate cut may come in December, with a 25-basis point reduction appearing likely.

However, the pace of future cuts will be dictated by economic indicators and the ECB has not ruled out the possibility of acting sooner if the economic outlook deteriorates significantly. While some ECB members have hinted that the pace could be slower than the market anticipates, the ECB remains open to adjusting its approach based on incoming economic data.