Investors and economists cannot completely shake off the idea that the europe central bank will implement larger rate cuts in the coming months. Although most europe central bank officials prefer a "gradual" (i.e., 25 basis points) rate cut, traders do not rule out the possibility that the europe central bank may double the rate cut to 50 basis points at one of its next three meetings.

Traders are currently focused on a key indicator measuring eurozone inflation expectations falling below 2%, as well as some surveys showing a contraction in economic activity in the Eurozone. At the same time, influential policymakers like Francois Villeroy de Galhau, a member of the European Central Bank's Governing Council and head of the Bank of France, are fueling market bets on the European Central Bank increasing the size of interest rate cuts – Francois Villeroy de Galhau urging his colleagues to retain full discretion over the size of the rate cut.

The European Central Bank seems likely to discuss a 50-basis-point rate cut at the policy meeting on December 11-12. European Central Bank Governing Council member Martins Kazaks warned last week that uncertainty "remains high" and officials will "definitely discuss this issue".

The plight facing the European economy is the main reason why the market speculates that the European Central Bank may implement larger interest rate cuts. November PMI data for the Eurozone indicates a dim economic recovery outlook, while political turmoil in the Eurozone's two largest economies – Germany and France – is affecting market sentiment.

However, there are reasons for the market to remain cautious about inflation. Although European Central Bank policymakers believe that the inflation rate will continue to reach the 2% target next year, wage increases remain high, unemployment is at historically low levels, and service prices continue to rise significantly.

Barclays' chief economist Christian Keller said: "I am almost willing to rule out the possibility of a 50 basis point rate cut by the European Central Bank in December, even though the market still believes this possibility exists." "This possibility is increasing in the first quarter of next year, but most signals currently indicate that the European Central Bank will continue to cut rates at a gradual pace."

Rabobank's head of macro strategy Jordan Rochester also stated that economic conditions may require a 50 basis point rate cut, but the ECB's response mechanism is closely related to past inflation, which is why the final rate cut may only be 25 basis points.

Most analysts agree. Only JPMorgan has brought forward the expectation of a 50 basis point rate cut by the European Central Bank from January next year to this month, citing the fragility of the eurozone economy, slowdown in the services sector inflation, and trade uncertainty.

Economists surveyed expect that by June next year, the European Central Bank will cut rates by 25 basis points at each policy meeting until the deposit facility rate falls to 2% (currently at 3.4%). Earlier, economists projected that the euro area deposit facility rate would not reach 2% until the end of next year.

The European Central Bank's upcoming latest forecasts, particularly economic forecasts, may shed some light on the situation. The ECB will look ahead to the economic outlook until 2027 and try to explain the increasingly lengthy risk list, including fiscal concerns, trade tariffs, geopolitical conflicts, etc.

Given these highly unpredictable risks, ECB policymakers typically prefer to take gradual action rather than confine themselves to a firm easing path. ECB President Lagarde stated last week: "Although we are on the path of falling inflation, and we know the direction of interest rates is downward, the pace of the decline is not predetermined." "I certainly will not commit to any specific numbers."

Other reasons hindering the ECB from making larger rate cuts also include the euro. Since Trump won the US presidential election, the euro has fallen by about 3%. While ECB officials have not set specific exchange rate targets, this decline may trigger new inflation concerns. In addition, more aggressive rate cut measures could also send a signal to investors that the euro area economy is in a difficult situation, possibly leading to a 50 basis point rate cut.

Nordic economists at United Bankshares, including Tuuli Koivu, believe that a 50 basis point rate cut in December will put the European Central Bank on a path to lower interest rates below neutral rates, possibly below 1.5%.

All of this may explain why even the most dovish European Central Bank policymakers have not commented on a larger rate cut. However, this has not stopped traders from preparing for this potential scenario. SEB Research's Chief Strategist Jussi Hiljanen said: "By March next year, the anti-inflation process should have progressed far enough to make the European Central Bank Governing Council more forward-looking, thus leading to a larger rate cut."

Editor/Rocky