Weekly focus: It is the season for rate cuts

As economic data continues to confirm that the inflation problem is more or less over, there is no longer a need for central banks to maintain restrictive levels of interest rates. Hence, this has been a week of rate cuts, and we expect next week to be the same – with some important nuances and exceptions.

The European Central Bank delivered the expected 25bp cut, although in our view they could easily have gone for 50bp, given weak growth indicators and the fact that euro area interest rates remain well above estimates of what the neutral level is and hence are still serving to dampen the economy further. However, the bank did signal a clearer path ahead for more cuts, and the market is coming around to our expectation that the deposit rate will be cut from the current 3% to 1.5% during 2025. One reason for the gradually lower outlook over the last month and generally increasing pessimism on the European economy was the weak PMI growth indicators from the euro area in November, so it will be very interesting to see the December numbers in the coming week. If they do not show clear improvement (and we do not expect them to), we are likely looking at a GDP decline in Q4. Note, though, that we will also get the January PMI before the next ECB rate decision. Both the Swiss and the Canadian central banks did cut by 50bp this week, which in the case of the former was a bit more than expected.

In the US, both we and the consensus expect a 25bp rate cut to be announced on Wednesday. Interest will likely centre on communication about the rate outlook for 2025, where we will get an update to the so-called dot plot showing what members of the monetary policy committee expect. Since we last got this update in September, market pricing has moved sharply towards fewer rate cuts, as the economy looks strong and as the Republican election victory could mean loser fiscal policy. However, inflation is well on track to reach its 2% target which was again confirmed by November data this week, and data for loans and credit continue to suggest that current monetary policy is quite restrictive. We see a strong case for the central bank to maintain its signal of a string of rate cuts in 2025, at least until we have more clarity over the fiscal policy outlook.

We expect the Bank of England to keep the Bank Rate unchanged at 4.75% on Thursday 19 December, sticking to its gradual easing cycle. While we get the labour market report for October/November and November inflation just days before, we do not expect this to move the needle of the immediate decision but prove more important for the 2025 outlook. We expect Sweden and Norway to remain very different also this week, with Sweden cutting rates again and signalling more to come, while Norway will likely hold tight, see the market movers section.

One central bank looking to increase rates rather than cutting them is the Bank of Japan. We have previously seen the upcoming December meeting as a likely date for that, but as support for the yen no longer seems acute, we think the Bank of Japan will stay on hold on Friday, and we push our expectation for the next rate hike to January.

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