The European Central Bank has announced its plans for lowering interest rates.

• Last week, the European Central Bank adopted a dovish stance, as evidenced by remarks from hawkish economist Robert Holzmann on Friday.
• The ECB rate is expected to fall to 1.75% by September next year, with a hold beyond that in money markets.
• What is the central bank's "neutral rate," and could it potentially decrease it to stimulate economic growth?

This week, the European Central Bank announced a quarter-point interest rate cut, and hinted that rates may decrease further early next year.

During her Thursday press conference, ECB President Christine Lagarde stated that policymakers in Frankfurt were not convinced that the battle against inflation had ended, as services inflation remained a cause for concern.

The most dovish meeting of the current cycle was held, as the ECB's new macroeconomic projections predicted lower inflation and growth rates for both this year and the next.

The ECB removed its message that policy rates must remain restrictive for as long as necessary, and Lagarde highlighted downside risks to the euro zone growth outlook, but also mentioned upside risks in the inflation picture. She revealed that a larger, half-point cut was debated, and that GC members unanimously voted to reduce rates.

The ECB staff forecast predicts average headline inflation of 2.1% in 2025, with stronger price rises expected at the start of the year, which may cause it to fall below the target later in the year.

Austrian central bank chief Robert Holzmann, who is known for being the ECB's arch-hawk and the only Governing Council member to vote for a rate hold rather than a cut in June, emphasized a dovish shift on Friday when he told reporters that there would be no danger in cutting rates next year if the economy progresses as expected, according to Reuters.

Where is neutral?

According to Holzmann, markets share the central bank's view that interest rates will approach a neutral level of approximately 2% next year, where monetary policy is balanced between stimulating and restraining growth.

On Thursday, the ECB reduced its deposit facility rate from 3% to 3%.

The neutral rate has been a contentious issue in recent months, and Lagarde stated on Thursday that although it was not discussed at the December meeting, staff believed it to be between 1.75% and 2.5%.

Will the ECB lower rates below the neutral level if inflation decreases and the growth forecast worsens, as suggested by France's central bank governor, Francois Villeroy de Galhau?

The ECB's rate-cut plan for 2025 has been widely predicted by the market based on this week's messaging.

The ECB rate is expected to fall to 1.75% by September next year, according to LSEG data, with a hold beyond that.

Some analysts suggested that there was now backing for rate cuts beyond the initial level.

According to Deutsche Bank economists, the ECB is projected to have sub-neutral rates by 2025 due to the ongoing trend of weak growth and below-target inflation.

Their baseline forecast for the end of 2025 was a 1.5% rate, but they acknowledged that a half-point adjustment could still occur.

UBS Global Wealth Management's chief euro zone and U.K. economist, Dean Turner, initially forecasted a 2% rate in June but now believes the risks are leaning towards the ECB taking more actions to support the economy in 2025, which could result in further cuts later in the year rather than larger moves earlier on.

According to Kamil Kovar, a senior economist at Moody's Analytics, core inflation will persist in driving ECB caution in the upcoming year.

According to Kovar, the serious battle over lowering rates will commence after March, as there is no cut scheduled in April and the last reduction occurred in June, keeping rates at 2.25%.