The European Central Bank (ECB) is set to conduct its third consecutive 25 bps rate cut, marking the 4th in total. This decision comes in the wake of lower GDP and CPI outlook, shrouded in uncertainty and downside risks. The anticipated rate cut is expected to prompt a shift in the policy statement’s tone, moving away from the need to keep policy restrictive in order to bring inflation sustainably back to 2%.
The ECB’s move towards forward-looking decision-making, rather than data dependence, is predicted to allow the bank to overlook any potential bumps in the inflation path early next year. This shift will enable the ECB to argue that price stability will be achieved in the long run, setting the stage for a more dovish approach. Despite expectations that end-of-2025 money market rates will remain below neutral levels, not all ECB officials are in favor of moving below neutral. ECB’s Schnabel highlighted that while a stimulative monetary policy can address cyclical economic weaknesses, it does not address the structural issues plaguing Europe.
Amidst these developments, Brazil made a significant move by raising its policy rate by a more-than-anticipated 100 bps to 12.25%. The Brazilian Central Bank (BCB) indicated further rate hikes over the next two meetings if the economic scenario unfolds as expected. With inflation rising above the target of 3% (+/- 1.5ppt) and inflation expectations hovering around 4.8% for this year, the BCB emphasized that risks remain tilted to the upside. The Brazilian real’s decline against the USD has exacerbated inflation pressures, prompting the BCB to take a cautious approach.
On the other side of the globe, Australia saw a notable rise in employment, with 35.6k new jobs added in November. The unexpected drop in the unemployment rate to 3.9% coupled with strong full-time employment figures indicate a robust labor market. The Reserve Bank of Australia’s (RBA) recent dovish shift has brought life to rate cut expectations, with the market now pricing in a potential rate cut in April next year.
As central banks around the world navigate economic challenges, the financial markets are closely watching for cues on policy directions and their implications on global economies. Stay tuned for more updates on how these decisions shape the future of monetary policy and economic landscapes worldwide.
