Rate Cuts All-Around

Good Morning Ladies and Gentlemen

”What exactly is your ‘fair share’ of what ‘someone else’ has worked for?”

Thomas Sowell

The ECB Base Rate Cut Expectation

The European Central Bank’s (ECB) monetary policy meeting scheduled for yesterday, December 12, 2024, brought no surprises. Expectations were for a rate cut of 25 basis points, reducing the rate from 3.25% to 3.00%.

Current: The ECB Base Rate Cut Reasoning

The European Central Bank (ECB) is continuing its strategy and staying the course to combat a decreasing threat of inflation by implementing its fourth key interest rate cut since this summer. The deposit rate, which significantly impacts financial markets, has been lowered by a quarter of a point to 3.00%. Under the leadership of central bank president Christine Lagarde, the monetary authorities began the trend of rate cuts in June 2024 and have maintained this approach consistently. It marks the first time in over a decade that the ECB has reduced interest rates in four consecutive meetings.
However, despite these reductions, significant economic risks remain for the eurozone, as indicated by key leading economic indicators. Additionally, the labour market shows signs of weakness, with layoffs and plant closures reported among major European car manufacturers. These developments add pressure on the ECB to take further action. The recent measures by the ECB should be viewed in the context of balancing interests, especially as the monetary watchdogs are currently facing a renewed rise in inflation rates.

Future: The ECB Base Rate Path

However, it is not surprising that we are seeing some effects from energy prices as the year comes to a close. At the beginning of the year, it was already evident that base effects related to energy prices would impact the current situation. Consequently, the European monetary authorities are likely to feel relatively relaxed about the slight increase in price pressure in the short term. The key factor remains that the medium-term inflation outlook is expected to remain stable. For this reason, I anticipate that the monetary guardians will continue to lower interest rates in the coming year. In the first half of the year, we will experience significant base effects, which should contribute to a decline in the core inflation rate, and it is the core inflation rate, which excludes energy and food prices, that has been a particular concern for the central bank recently.
Nevertheless and as usual, the European Central Bank left open whether and how the interest rate staccato will continue in 2025.

The Swiss National Bank

The Swiss National Bank’s (SNB) decision to lower the interest rate by 50 basis points to 0.5% instead of the expected 25 basis points caught me by surprise for two main reasons. First, I didn’t observe sufficient pressure for such a significant cut due to economic factors. Second, I feel that this action may unnecessarily restrict the potential for future rate reductions.
It seems the SNB is heavily relying on the stimulating effect of this largest interest rate cut by Swiss monetary authorities in nearly a decade, aiming to preemptively address any signs of deflation or recession. As a wanted result, the Swiss franc weakened against the Euro, making Swiss exports cheaper and more competitive. However, historically, these effects have only been successful in the short term.

Last But Not Least

The next U.S. Federal Reserve meeting is scheduled for Wednesday, December 18. Will we see another rate cut before Christmas?

Ladies and Gentlemen

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Many thanks, indeed!

I wish you an excellent start to the day and the weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
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Mail: smk@incrementum.li