Investing.com -- The European Central Bank (ECB) is widely expected to cut interest rates by 25 basis points to 3% during its December 12 meeting, UBS analysts highlighted in a recent note.
The bank explained that the decision will likely be influenced by updated macroeconomic projections, which are expected to show inflation reaching the 2% target by early 2025.
UBS forecasts the ECB will continue cutting rates by 25 basis points at subsequent meetings in January, March, April, and June, bringing the deposit rate to a neutral level of 2% by mid-2025.
This gradual approach is said to reflect the assumption that Eurozone labor markets will remain resilient, meaning wage growth will only decline slowly.
“However, this argument cuts both ways: If labour markets were to weaken more visibly, wage growth were to come down much faster, or GDP were to perform weaker than our base case scenario, the ECB would have to cut faster and below neutral,” added UBS.
The ECB is also expected to unveil updated macroeconomic projections, including forecasts for 2027, for the first time.
UBS predicts the 2024 inflation forecast will be revised slightly lower to 2.4%, while the 2026 headline inflation forecast will rise to 2.0%. The investment bank believes GDP growth projections are likely to remain subdued, with a modest uptick expected in 2026 due to improved technical assumptions.
Another key focus of the meeting will be the ECB's forward guidance. UBS anticipates the ECB will maintain its data-dependent approach but may drop references to keeping rates "sufficiently restrictive," signaling a shift in tone as inflation trends toward the target.
UBS also flagged potential impacts on bond and currency markets. They project German 2-year yields to decline further and maintain a medium-term bearish outlook on the euro, targeting EUR/USD at 1.04 by the end of 2025.
However, they suggested fading any near-term EUR rebounds toward 1.07, noting vulnerability to U.S. policy shifts under the incoming Trump administration.