Weekly Update - Central banks : desynchronization confirmed

CENTRAL BANKS : DESYNCHRONIZATION CONFIRMED
The Fed and the ECB held their first meeting of the year and as expected, their monetary policies diverged. On the one hand, the Fed left its key interest rate unchanged at 4.5% given the resilience of activity and uncertainties about the path of inflation. The ECB continued its rate cut cycle in the face of less dynamic growth. This desynchronization is expected to continue in the coming meetings. 
 
Federal Reserve: a pause between resilient activity and high uncertainty
After cutting rates by 100bps at the end of 2024, the Fed started 2025 by maintaining its key rate range at 4.25%-4.50%. This decision was widely anticipated by the markets due to the resilience of economic activity and the slowdown in disinflation in recent months. Indeed, growth remains robust, at 2.3% in Q4 24 (Q/Q annualised), i.e. growth of 2.5% for the whole of 2024, with household consumption still very dynamic. At the same time, inflation continues to slow but at a slower pace, core inflation stood at 2.5% in Q4 24, with services inflation still rigid. While these elements justified the maintenance of a "slightly restrictive" policy, Jerome Powell also mentioned during his press conference the strong uncertainties introduced by the trade, migration and fiscal policies of the new US administration on the outlook for growth and inflation. The central bank remains hence cautious about future interest rate cuts. We believe that these uncertainties would prompt the Fed to keep its key rates unchanged again at the next meeting in March, but that the further easing of inflation would allow for a gradual easing of 50bps in 2025. 

There is always the risk that the full implementation of Trump's program would increase inflationary pressures and could lead the Fed to maintain a more restrictive
 
European Central Bank: a continuation of the rate cut between sluggish activity and disinflation
Unlike its US counterpart, the ECB decided to continue its monetary easing cycle, cutting its deposit facility interest rate by 25bp to 2.75%. This decline comes in a context of sluggish growth and more pronounced disinflation. Indeed, Q4-24 growth figures showed almost stagnant activity in the currency area, with Germany still flirting with recession, and weak momentum in France and Italy. Spain is the only major economy in the region that is doing well, with growth of 3.2% in 2024, supported by higher public spending and growth in the labourforce. Inflation, on the other hand, continues to slow, with core inflation in January still below the ECB's 2% target for France and Italy and Spanish inflation continuing to converge towards the target. 

Only German inflation shows a more gradual easing, with core inflation at 2,9% in January, explained by inflation in the services sector still high. The ECB continued the cycle of interest rate cuts, with Christine Lagarde noting that the disinflation process is "on track", that growth "faces various headwinds" and that the rate path remained on a downward path. We continue to expect the ECB to continue to gradually ease rates to 2%, thus accentuating the desynchronization with the Fed.
 
Other highlights of the week
 
In the highlights of the week, we chose to talk about the turning-point in the AI industry with DeepSeek and the bankloans outstanding in the euro area :
 
Deepseek stirs up the AI race 
The Chinese company Deepseekhas shaken up the AI sector with its new generative Large Language Model (LLM) R1. Its performance is like that of Open AI's ChatGPT LLM model (particularly when it comes to solving complex problems), and it is based on a free open-source system (making it easy to access). Deepseekis thus challenging the idea of the need for very significant investment and introducing a competitor into a world hitherto dominated by American companies. At the same time, MrTrump has just announced the $500 billion Stargate project to develop AI. Against this backdrop, companies involved in this industry are stalling, with NVIDIA's share price down 13% over the week.
 
Euro area : a timid recovery in bank lending 
Bank balance sheet data for December show a slight recovery in lending. Outstanding loans to households rose by 0.5% year-on-year, with a slight increase in mortgage lending. Outstanding business loans were slightly more buoyant, rising by 1.1% year-on-year, mainly due to a continued positive contribution from long-dated loans. Against a backdrop of further interest rate cuts by the ECB and a good level of bank capitalisation, we expect lending to continue its recovery.

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