On the evening of December 12, a significant financial decision reverberated across European markets as the European Central Bank (ECB) announced a pivotal reduction of its three key interest rates by 25 basis pointsThis adjustment sees the deposit facility rate now set at 3.00%, the main refinancing rate at 3.15%, and the marginal lending facility rate reduced to 3.40%. This marks the fourth interest rate cut by the ECB in 2023, pushing the benchmark rates to their lowest levels since March of this year, following a prior cut in June.

Notably, the ECB's recent statement omitted the previously held view of maintaining rates at "sufficiently restrictive" levels, indicating a readiness for more cuts in the futureThere was an explicit warning about the economy growing at a slower pace than forecastedThe immediate reaction in the stock market was optimistic, with major European indices showing a collective rise; by the time this report was published, Germany's DAX was up 0.04%, France's CAC40 rose 0.13%, and the UK's FTSE 100 increased by 0.15%.

In recent months, inflation across the Eurozone has unexpectedly resurged, with November figures climbing back above the ECB's targeting rate of 2%. The inflation rate jumped from 2.0% in October to 2.3% in November

On the one hand, the Eurozone's economy recorded its fastest growth rate in two years during the third quarter, albeit modest at just 0.4%. However, despite these inflationary pressures, the ECB remains optimistic about the efficacy of its anti-inflation measures, projecting inflation rates of 2.4% for 2024, decreasing to 2.1% in 2025, and 1.9% in 2026. These estimates have slightly improved from the previous predictions made in September, which were at 2.5%, 2.2%, and 1.9%, respectively.

Christine Lagarde, the ECB president, reiterated the institution's commitment to adjusting its policy for an economy that appears to be losing tractionShe indicated that the anticipated GDP growth rates for 2024 and beyond are relatively subdued, with forecasts of 0.7% growth in 2024, 1.1% in 2025, and 1.4% in 2026. Meanwhile, Sylvain Broyer, an economist at S&P, cautioned that while inflation seems manageable in the short term, vigilance remains crucial, particularly in light of rising labor costs outpacing productivity.

Brzeski from ING acknowledged the ECB's proactive stance in preparing for a potential economic downturn, taking into account the prevailing uncertainties surrounding U.S

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policiesFor southern European economies, a resurgence in tourism potentially offers a beacon of hope for 2025. Meanwhile, the political landscapes in Germany and France are critical considerations for the bank's next moves.

As a direct outcome of the ECB's decision, traders in the swap market largely maintained their positions, anticipating up to five more cuts of 25 basis points by September next year, projecting the deposit rate to drop to 1.75%. In contrast, the Federal Reserve is expected to lower its rates by approximately 75 basis points over the same period, steering its policy rate into a target range of 3.75% to 4%.

This week marks an event dubbed the "Super Central Bank Week," as other major global banks follow suit with their monetary policiesJust hours before the ECB's announcement, the Swiss National Bank (SNB) made headlines with an unexpected cut of 50 basis points, bringing its policy rate down to 0.50%—a record fourth consecutive cut this year

This reduction exceeds market expectations that had anticipated only a 25 basis-point decreaseThe current move is also the largest cut since the SNB's emergency reduction in January 2015.

The SNB attributed its interest rates cut to a marked decrease in underlying inflationary pressuresSince the last cut, inflation has dipped below projections, with the Swiss Consumer Price Index (CPI) showing a year-on-year increase dropping from 1.1% in August to 0.7% in NovemberThis decline encompasses both goods and services, which have also seen a downturn in price rises.

Despite these rate changes, the SNB expressed concerns regarding the uncertain outlook for the global economy, particularly in the U.S., where future policy directions remain unpredictableRising political risks within Europe also contribute to this air of uncertainty, compounded by escalating geopolitical tensions that might weaken global economic activities

The potential for inflation rebounds in certain countries cannot be disregarded.

Adding to the international financial landscape, the Bank of Canada also made a significant move on December 11, cutting its rates by 50 basis points to 3.25%, aligning with market expectationsThis is a continuation of its trend, marking the fifth consecutive rate cut for CanadaCanada's Bank started its easing cycle in June with a 25 basis-point drop, followed by two further reductions of similar magnitude in July and SeptemberThe October meeting saw a steeper cut of 50 basis points, and the recent decrease matched this pace.

Canada has taken on the role of a frontrunner in this bout of monetary easing, being the first G7 nation to reduce ratesFollowing in its wake, major central banks including the ECB and the Federal Reserve began initiating their own rates cutsCanadian authorities have pointed out that the imposition of a 25% tariff on Canadian goods exported to the United States casts a long shadow over the nation's economic outlook