G10 central banks start the year in a dovish overall mood

Summary

It was a busy week for foreign central banks, with several institutions offering their first monetary policy assessment of 2025. The European Central Bank lowered its policy rate 25 bps to 2.75%, while repeating that inflation should converge to 2% by late this year and that growth remains weak. We expect 25 bps rate cuts in March, April, June and September, for a terminal policy rate of 1.75%.

The Bank of Canada cut its policy rate 25 bps to 3.00%, but did not offer any future policy guidance amid tariff-related uncertainty. We would not interpret that as a hawkish signal, however, and indeed the central bank's modeling suggested higher tariffs would have a relatively rapid and substantial impact on economic growth, and a somewhat more gradual impact in boosting inflation. Our view remains for 25 bps rate cuts in March, April and June, which would see the policy rate reach a low of 2.25%.

Sweden's Riksbank cut its policy rate 25 bps to 2.25%, while its accompanying statement was mildly dovish in tone. We think an accumulation of benign inflation and subdued activity data will see the central bank deliver a final 25 bps rate cut by May. In Australia, the latest inflation figures slowed more than forecast and pointed to an easing in domestic price pressures. We now expect the Reserve Bank of Australia to start its easing cycle with a 25 bps rate cut in February, and look for a cumulative 100 bps of policy rate cuts this year, to a low of 3.35%.

European Central Bank continues its rate cut cycle

The European Central Bank (ECB) lowered its Deposit Rate by 25 bps to 2.75% at its first monetary policy announcement of 2025 and delivered an accompanying statement that, while not overtly dovish, is in our view consistent with further easing at upcoming meetings. Among the key points, the ECB said:

• The disinflation process is well on track, and that most measures of underlying inflation suggest that inflation will settle around the 2% target on a sustained basis.

• Domestic inflation remains high, but wage growth is moderating as expected and profits are partially buffering the impact on inflation.

• Monetary policy remains restrictive and the economy is still facing headwinds. On a more encouraging note, rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time.

With respect to policy guidance, the ECB said it will follow a data-dependent and meeting-by-meeting approach to its monetary policy decisions, and that it is not pre-committing to a particular rate path.

Comments from ECB President Lagarde at the post-meeting press conference did not deviate significantly from the initial ECB announcement. Lagarde said there were both upside and downside risks to inflation, but that risks to the growth outlook were tilted to the downside. Lagarde said the ECB would publish a report on the neutral policy interest rate in early February, while also adding that discussing where to stop interest rate cuts is premature—the latter an indication that further interest rate cuts should be forthcoming.

Overall, we don't see anything in today's announcement and post-meeting press conference that would prompt us to change our outlook for ECB monetary policy. Eurozone growth remains very sluggish, as evidenced by the flat quarter-over-quarter outcome for Q4 GDP, along with small quarterly declines for German and French Q4 GDP. Our view remains for further 25 bps rate cuts at the March, April, June and September meetings, which would see the Deposit Rate reach 1.75% by September, though the later rate cuts in particular would require a further deceleration in wages, services inflation and core inflation in the months ahead. Our view is more aggressive than currently expected by market participants, which anticipates a Deposit Rate of around 2.00% by September.

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