BlackRock: A limited Christmas cheer from the ECB

Response to the ECB rate cut from Roelof Salomons, Chief Investment Strategist at asset manager BlackRock .

• Prospect of further easing in 2025... The ECB cut interest rates by 25 basis points today. A key question for 2025 will be when and where the rate-cutting cycle ends. Christmas stockings weren’t left empty today. A series of consecutive cuts remain on the table, subject to a “data-dependent” approach. And President Lagarde took a modestly dovish tone, particularly with the removal from the policy statement of guidance for rates to be "sufficiently restrictive for as long as necessary". But the jury is still out on whether the ECB will pause once the policy rate reaches a broadly “neutral” level of 2% in summer 2025, as we currently expect, or whether it will lower rates to a moderately loose policy stance.

• …but a mixed bag of Christmas presents for future growth. The ECB has more room to cut interest rates than the Fed, having taken rates further into restrictive territory, and gained confidence that inflation will return to its 2% target earlier next year. Meanwhile, despite encouraging signs of reviving private consumption, the euro area faces drags to growth from potential U.S. trade tariffs, rising geopolitical fragmentation and political uncertainty in some euro area member states.

• Not going back to very easy policy. Given persistent inflation pressures, we think only a sharp economic deterioration from here would prompt larger cuts and the ECB rushing meaningfully below neutral. This is not your typical cutting cycle nor a return to the world we once knew, where inflation was consistently well below the 2% target and policy was very accommodative. With easing but still-tight labour markets and productivity weak, domestic price pressures could keep inflation near or above 2%, as reflected in the ECB’s inflation projections for 2027. We think wage growth will cool further, but services inflation is still too high at roughly 3.9% in November.

• No Christmas surprise for markets. Markets already expect back-to-back cuts, taking the policy rate slightly below neutral in the second half of 2025. Investors should keep the big picture in mind: even if close to neutral, rates would be structurally higher than before the pandemic, supporting the appeal of income. On a tactical horizon, we prefer income in short-dated euro area bonds and credit, and remain tactically neutral on long-term euro area government bonds. We still favour U.S. stocks over Europe’s on stronger corporate earnings and the artificial intelligence theme – but find opportunities in Europe at the sector or company level.