The European Central Bank (ECB) is preparing to discuss a potential interest rate cut at its upcoming meeting. According to Konstantin Veit, Portfolio Manager at PIMCO, the focus will likely be on reducing the deposit rate by 25 basis points, from 3.25% to 3%.
This strategy balances managing inflation risks and supporting economic growth. Keeping rates at a restrictive 3% provides room to address potential inflationary shocks while also offering protection against economic downside risks.
New macroeconomic projections and labor cost dynamics
The Eurosystem’s updated macroeconomic projections, including estimates for 2027, indicate that inflation may return close to the 2% target by mid-2025. However, this trajectory hinges on controlling the growth in labor costs, a critical factor in ensuring long-term inflation stability.
A gradual reduction toward neutrality
Amid ongoing uncertainty regarding the exact level of the neutral rate, the ECB is expected to adopt a gradual approach in steering rates downward. This reflects persistent service sector price pressures. According to PIMCO, the debate on the appropriate neutral rate configuration is likely to intensify in the coming months.
Outlook for the future
PIMCO assesses that a terminal rate of approximately 1.8% by the second half of 2025 aligns with current estimates for the eurozone’s neutral rate. However, additional downside risks to growth, particularly following the U.S. elections, underscore the need for a well-calibrated risk management strategy.
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