On the evening of December 12, the European Central Bank (ECB) made a significant announcement, reducing its three key interest rates by 25 basis points eachThe deposit facility rate now stands at 3.0%, the main refinancing operations rate at 3.15%, and the marginal lending facility rate at 3.40%. This marks the ECB's fourth rate cut of the year, bringing the benchmark interest rates to their lowest level since March 2023, with the previous reduction occurring in June.

In its accompanying statement, the ECB removed the phrase emphasizing that rates would remain "sufficiently restrictive," hinting at the possibility of further cutsThe central bank also warned that economic growth would be weaker than previously projectedThis change in tone reflects the ECB's response to evolving economic conditions in the Eurozone.

On the same day, major European stock indices saw a collective rise

By the time of reporting, Germany's DAX index was up by 0.04%, France's CAC40 by 0.13%, and the UK's FTSE 100 by 0.15%. This uptick in the stock markets highlights investor optimism in response to the ECB's decision and the potential for a more supportive monetary environment.

Economic growth is poised to slow down.

In November, the inflation rate in the Eurozone climbed back above the ECB's target of 2%, rising from 2% in October to 2.3%. This inflationary pressure coincided with the Eurozone's economy experiencing its fastest growth in two years during the third quarter, albeit at a modest 0.4% growth rateThis situation illustrates the complexities the ECB faces as it navigates between stimulating growth and managing inflation.

Despite this inflationary uptick, the ECB maintains that progress is being made in combating inflation

The central bank projects inflation rates of 2.4% for 2024, 2.1% for 2025, and 1.9% for 2026, indicating a gradual decline in price growth over the next few yearsNotably, these forecasts have been adjusted from September's estimates of 2.5%, 2.2%, and 1.9%, respectively, suggesting some improvement in the inflation outlook.

ECB President Christine Lagarde reiterated the bank's stance at a subsequent press conference, emphasizing that economic momentum is waningThe central bank anticipates GDP growth rates of 0.7% for 2024, 1.1% for 2025, and 1.4% for 2026, reflecting a cautious outlook as economic conditions evolve.

Economist Sylvain Broyer from S&P believes that inflation remains manageable in the short term, yet warns that the ECB must stay vigilant, particularly if labor costs outpace productivity growth

He predicts the ECB will continue to lower interest rates at a brisk pace over the coming months to ensure that monetary policy adapts to changes in the economy.

Carsten Brzeski from ING emphasizes that the ECB is preparing for potential growth declines, particularly in light of the significant uncertainty surrounding U.Spolicies that may affect Europe, especially regarding trade and economic stabilityThe recovery of the tourism industry in Southern European economies could emerge as a bright spot by 2025, although the current focus remains on the economic challenges facing Germany and France.

Following the ECB's interest rate decision, traders in the swap market have largely maintained their betsThey're now forecasting five additional rate cuts of 25 basis points each by next September, which would lower the deposit rate to 1.75%. In contrast, during the same period, the Federal Reserve is expected to cut rates by approximately 75 basis points, targeting a policy rate range of 3.75% to 4%.

A global "super central bank week" is upon us.

This week marks what has been dubbed a "super central bank week" globally, highlighting a spate of significant monetary policy announcements.

Just hours before the ECB’s announcement, the Swiss National Bank (SNB) surprised markets by lowering its policy interest rate by 50 basis points to 0.50%, which is its fourth consecutive cut this year

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The market had largely anticipated a reduction of only 25 basis pointsThis cut represents the largest decrease since the SNB's emergency actions in January 2015.

The SNB attributed this decision to a perceived drop in underlying inflation pressuresSince the last rate cut, inflation has once again dipped below expectationsThe Swiss Consumer Price Index (CPI) year-on-year growth fell from 1.1% in August to 0.7% in November, with both goods and services experiencing price declines.

However, the SNB remains cautious regarding the global economic outlookIt notes that the future trajectory of U.Seconomic policies remains highly uncertain, compounded by increasing political uncertainties in EuropeAdditionally, geopolitical tensions might discourage global economic activity

Just as importantly, a rebound in inflation cannot be ruled out in some countries.

On December 11, the Bank of Canada also cut its rate by 50 basis points to 3.25%, which was in line with market expectationsThis represented the Bank of Canada’s fifth consecutive rate cutBeginning its easing cycle in June, the Canadian central bank first lowered its rate by 25 basis points, followed by two more cuts of the same magnitude in July and SeptemberBy October, it escalated the pace by cutting rates by 50 basis points, mirroring the current reduction.

Canada has been a forerunner in this monetary easing cycle, being the first G7 country to lower ratesFollowing Canada's lead, both the ECB and the Federal Reserve have since joined the trendThe Bank of Canada reasons that trade tensions pose risks to its economic outlook, particularly concerning threats from the U.S