The European Central Bank delivered an an expected interest rate cut of a quarter of a point this week - and along with the announcement came several indications that rates will quickly move even lower early next year.

ECB President Christine Lagarde noted during her Thursday press conference that policymakers gathered in Frankfurt do not believe the fight against inflation is over, with services inflation still a concern. .

However, overall, it was the most conventional meeting of the current cycle, not least because the ECB's fresh macroeconomic forecast predicted lower rates of inflation and economic growth both this year and d - next.

Economists also jumped on the removal of the ECB's message that the central bank wants to "keep policy rates sufficiently restrictive for as long as necessary." Lagarde stressed that there were downside risks to the already weak euro zone growth outlook, but said the inflation picture had improved significantly and included upside risks. She also said that a larger reduction of half a point had been discussed, and that the members of the Governing Council (GC) voted unanimously to reduce the rates.

The new ECB staff forecast, meanwhile, put average nominal inflation slightly above target at 2.1% in 2025, with stronger price increases expected at the start of -year which suggest it may fall short of the target later in the year.

The dovish shift was highlighted on Friday when Austrian central bank chief Robert Holzmann — widely perceived as the ECB's arch-hawk and the only member of the Governing Council to vote for retention of rates rather than a cut in June — told reporters that there would be no danger in the cut. rates next year if the economy progresses as expected, according to Reuters.

Where is neutral?

Holzmann also said that the markets had a "similar assessment to that of the central bank" that interest rates will fall towards a neutral level - when monetary policy is balanced between strengthening and restricting growth - of about 2% next year.

The ECB cut the deposit facility — its key rate — to 3% on Thursday.

What constitutes the neutral rate was a main point of debate in recent months, and Lagarde said Thursday that while it was not discussed at the December meeting, staff saw it between 1.75% and 2.5%.

Another question for market participants is whether the ECB will take rates below this neutral level if inflation falls further and growth prospects deteriorate, as it has floating in water by the governor of the central bank of France, Francois Villeroy de Galhau.

This week's messages broadly confirmed existing market bets on the ECB's rate cut plan for 2025.

According to LSEG data, money markets continue to price in a cut in the ECB's key rate to 1.75% by September next year, with retention beyond that.

But some analysts said there was now support for a rate cut that goes beyond that.

Deutsche Bank economists said in a note on Friday that the ECB was on course for sub-neutral rates in 2025, given the trend for weak growth and inflation below target.

They added that their baseline outlook was for a rate of 1.5% at the end of 2025 through a reduction of a quarter of a point, but that a move of half a point remained possible.

Dean Turner, head of the euro zone and UK economist at UBS Global Wealth Management, pegged his forecast at a 2% rate in June, but said risks were now "tilted towards the ECB to have to do more, not less, to support the economy in 2025" — likely to mean more tapering later in the year rather than bigger moves earlier.

However, Kamil Kovar, senior economist at Moody's Analytics, argued in a note that stubborn core inflation will continue to drive the ECB's caution next year.

"We think that after March, the battle over how far to lower rates will begin in earnest. We have no cut in April and the last cut in June, leaving rates at 2.25% ," Kovar said.