09:18 AM EST, 12/10/2024 (MT Newswires) -- Deutsche Bank said it expects the European Central Bank to cut the policy rate by 25bps to 3.00% at Thursday's policy meeting.

This will be the fourth cut since the start of the easing cycle, making it 100bps of cuts so far in this cycle. The bank estimates Thursday's ECB press conference to emphasize uncertainty and the Governing Council to reach a compromise on communications that creates more policy optionality.

Deutsche Bank reviews the latest data through the lens of the ECB's three-part reaction function: inflation outlook, underlying inflation and transmission. The data imply a slight downgrading of the outlook for inflation -- including an acceleration of the point when HICP reaches the 2% target from end-25 to mid-2025 -- underlying inflation broadly stabilizing around the 2% target level and financial conditions indicators consistent with passing peak transmission.

Overall, the data is consistent with the ECB continuing to unwind policy restrictions at back-to-back meetings and a 25bps cut in December rather than a 50bps cut, stated the bank.

There is considerable uncertainty going forward, not least around the timing, extent and impact of United States tariffs, and as such the Governing Council is likely to want to keep its policy options wide open in 2025. Deutsche Bank predicts the doves and hawks to compromise on a mildly dovish evolution of ECB communications.

The bank sees language that implies more optionality on the timing, pace and destination of cuts and allows movement towards a more forward-looking approach to policy.

Finally, Deutsche Bank believes about which parts of the press conference are likely to determine the market reaction: whether the inflation forecasts are below 2%; whether the Council continues to believe the downside risks to inflation dominate the upside risks -- and whether the Council believes tariffs raise inflation in the short term; whether any Council members support a 50bps cut; whether the Council thinks policy rates are still restrictive at 3.00%; whether the Council thinks the economic weakness is structural and cannot be addressed by monetary easing; and whether the ECB appears sensitive to foreign exchange weakness.