Fud International: It is expected that the European Central Bank will maintain its current pace of interest rate cuts until rates reach a neutral level of around 2%.

Salman Ahmed, head of the Global Macro and Strategy Asset Allocation Department at Fidelity International, stated that looking ahead, he expects the European Central Bank to maintain its current pace of interest rate cuts until rates reach a neutral level of around 2%, and then gradually take more incremental steps to cut rates at individual meetings. Ahmed's views remain somewhat more moderate than those reflected in current market prices, predicting that growth pressures will eventually bring interest rates down to 1.5% by the end of the year or earlier, mainly due to ongoing concerns about global trade tensions. It is expected that there will be progress on tariffs in the coming weeks, and tariffs are a key factor affecting the future policies of the European Central Bank. At the first interest rate meeting in 2025, the European Central Bank continued to cut interest rates to support the struggling economy, while the Federal Reserve remained unchanged. The future policies of the two central banks are uncertain, depending on President Trump's exact policies on tariffs and their impact on inflation and economic growth (especially in Europe). As widely expected, the Federal Reserve maintained its policy rate at 4.25% to 4.50%, marking the first time it has held steady since starting to cut rates last year, due to facing an increasingly complex economic environment. The post-meeting statement from the Federal Reserve showed significant changes, including upgrading the assessment of the labor market from "generally slowing down" to "stabilizing," reflecting strong December employment data. Although the statement no longer mentions continued progress on inflation, instead stating that inflation is "maintaining at higher levels," Chairman Powell downplayed the changes in the statement during the press conference, stating that it was just a "word adjustment." Fidelity International stated that the key signal from the press conference is that future inflation trends will be cautious, especially as Powell avoided all questions related to tariffs. While he emphasized that the FOMC is no longer "eager" to cut rates, Powell himself is more inclined to do so. For example, he reiterated that the current policy is still "fairly restrictive," and indicated that if data on the labor market or inflation suggests a need, he would lean towards cutting rates. Therefore, faced with the apparent tough stance of the FOMC and Chairman Powell's apparent inclination to cut rates, the market has become uncertain. Fidelity International believes that once the Federal Reserve begins to incorporate the substantive policies of the new government into its expectations, this contradiction will eventually be resolved. Fidelity International predicts that a combination of tariffs and reduced immigration policies will keep inflation high. The labor market is stabilizing rather than weakening, and they are more convinced that the FOMC will continue its current policy in 2025 to prioritize policy stability rather than adjusting it prematurely. Fidelity International stated that the European Central Bank's cut in the main policy rate by 0.25% to 2.75%, also aligns with expectations, and the related statements remain largely unchanged, emphasizing the need to evaluate based on data at each meeting. The European Central Bank still considers the current interest rates to be restrictive, stating that further rate cuts will be made until rates reach a neutral level. Market participants generally agree with the European Central Bank, with the neutral rate being around 2%. However, considering the bleak growth prospects, we believe that the possibility of cutting rates to the accommodative range has increased. Although there were no new economic forecasts released at the meeting, recent data supports the above views, including GDP growth in the fourth quarter remaining flat at 0.0%, lower than the European Central Bank's previous forecast of 0.2%, indicating an increased downside economic risk. In terms of inflation, both overall and core inflation indices in the fourth quarter were reported lower than expected, but President Lagarde pointed out that high wages and escalating global trade tensions leading to strained supply chains could create inflationary pressure. In the near term, rising energy prices and currency devaluation also bring additional inflationary risks. However, Lagarde emphasized that the deflation trend "continues." The latest bank lending survey shows that credit conditions are further tightening, primarily due to uncertainty in trade policies. Banks believe that risks are increasing, and lending growth continues to slow down, strengthening the need for further easing of monetary policy.