The European Central Bank (ECB) is expected to announce a 25-basis-point interest rate cut on Thursday at its final meeting of 2024, a move that would lower the deposit facility rate to 3%.

This would mark the fourth consecutive quarter-point reduction this year, as the ECB navigates a challenging economic landscape marked by subdued growth and persistent inflationary pressures.

A key issue for the ECB’s Governing Council is determining how far rates should be cut to reach “neutral” territory — where monetary policy neither stimulates nor restricts economic growth.

In a chat with Bloomberg last month, Isabel Schnabel, an influential ECB policymaker estimated the neutral rate at 2-3% and warned against dropping rates too far below that range.

However, more dovish voices, such as French central bank Governor Francois Villeroy de Galhau, argue that rates may need to dip into accommodative territory — below neutral — if growth remains weak and inflation falls below the ECB’s 2% target.

“This is the ECB, so they always move very slowly,” said Fabio Balboni, senior European economist at HSBC, predicting a lively debate among policymakers before settling on a modest 25-basis-point cut.

Economic struggles weigh on policy direction

The eurozone’s economic challenges are front and center in Thursday’s discussions.

Weak German retail sales and sluggish manufacturing data across major economies have underscored the region’s struggle to regain momentum.

Despite this, a 50-basis-point cut appears unlikely even as headline inflation nears the ECB’s 2% target, as underlying pressures, such as wage growth and persistent service-sector inflation, remain a concern.

Also, the ECB’s conservative approach contrasts with the Federal Reserve and the Bank of England, which have surprised markets with unexpected policy moves.

Analysts widely expect the ECB to maintain its predictable path, cutting rates gradually over the coming quarters.

Bank of America Global Research forecasts 25-basis-point reductions at each ECB meeting through September 2025, potentially bringing the deposit facility rate to 1.5%.

“The eurozone economy will grow at or below trend for most of 2025, necessitating further easing,” the bank noted.

Projections and messaging in focus

Two key updates will shape market reactions to the ECB’s decision: new macroeconomic projections for growth and inflation, and potential shifts in the bank’s messaging.

The ECB has consistently stated it will “keep policy rates sufficiently restrictive for as long as necessary.”

A dovish pivot in this language would signal a faster pace of rate cuts, particularly given global uncertainties such as trade tensions with the US.

A more accommodative stance could be essential to address the eurozone’s weak growth prospects.

“We think there could be some downward revision to growth and perhaps even inflation forecasts today,” Chris Turner, global head of markets at ING, said in a note today.

“Dropping the 2025 forecast closer to 2.0% could potentially lay the path for an accelerated easing cycle,” he added.

Gradual easing for long-term growth

Goldman Sachs’ Chief European Economist, Jari Stehn, expects Thursday’s decision to reaffirm the ECB’s gradual easing strategy.

“Lower rates will help somewhat with savings and boosting consumer spending, which is why we believe Europe will grow next year,” Stehn said.

Despite the cautious pace, the ECB’s ongoing rate cuts are seen as a critical step toward stabilizing the eurozone economy.

By signalling its willingness to adjust policy, the central bank aims to strike a delicate balance between managing inflation and fostering conditions for long-term growth.

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