Gold prices edge higher on raised Fed rate cut hopes
Thursday’s release of the euro-zone GDP data for Q4 revealed a stagnant economy, prompting Capital Economics to forecast that the European Central Bank (ECB) will implement more interest rate cuts this year than the market currently anticipates.
The firm expects the ECB to reduce the deposit rate from the current 3% to 1.5% later in the year, as the Q4 GDP reading came in below both the consensus and the ECB’s own projections.
The euro-zone’s GDP remained unchanged in Q4, defying the modest growth expectations of 0.1% set by consensus forecasts and the ECB’s December projection of a 0.2% expansion.
This stagnation marks a deceleration from the 0.4% growth seen in Q3. While some of the slowdown can be attributed to volatility in Ireland’s data, with GDP excluding Ireland rising by 0.3% in Q3 and 0.1% in Q4, the overall picture is bleak.
France experienced a slight GDP decline in Q4, and both Germany and Italy saw contractions, leaving Spain as the only major economy in the region to register growth.
The sluggish economic performance is starting to impact the labor market, despite the unemployment rate only inching up to 6.3% in December from a revised record low of 6.2% in November.
Indicators of labor demand, such as the European Commission’s measure of firms’ employment intentions, suggest a slowdown in job growth.
Capital Economics predicts that a softer labor market will lead to reduced wage growth and services inflation, further justifying the ECB’s need to cut interest rates more aggressively than currently expected by the market.
In light of these developments, Capital Economics stands by its forecast that the ECB will take more decisive action to address the weak economic conditions.
The firm’s projection of a significant rate cut aims to reflect the challenges facing the euro-zone economy as it enters 2025 with a slow start, as indicated by January’s activity surveys.
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