The European Central Bank is considering its final interest rate cut of the year, but a large-scale move remains uncertain.

• It is predicted that the European Central Bank will cut interest rates by 25 basis points on Thursday, instead of the previously anticipated 50-basis-point reduction.
• Despite economists' warnings, the risks to the euro zone economy and inflation have intensified, prompting the central bank to accelerate its monetary easing in 2025.
• The policies of U.S. President-elect Donald Trump are causing high uncertainty, according to macro forecasts.

On Thursday, the European Central Bank will make its final interest rate cut of the year, although it is predicted to opt for a quarter-percentage-point reduction instead of a half-percentage-point one. However, economists anticipate that a more rapid pace of monetary easing will follow.

The upcoming meeting is crucial for setting guidance for the year ahead, as ECB staff will release their quarterly macroeconomic projections on growth and inflation. These forecasts will take into account the highly uncertain global impact of Donald Trump's return to the White House and his threats of sweeping trade tariffs.

This year, the central bank of the bloc has reduced its key rate from 4% to 3.25% in three 25-basis-point decrements, occurring between June and October.

The possibility of the ECB making a 50-basis-point cut in 2024 was discussed after the latest autumn meeting, with several policymakers stating that they would remain data-dependent. However, a significant slowdown in euro area inflation and a worsening economic outlook for the bloc could prompt a big move in December.

The money market suggests that there is little chance of a jumbo trim, as of Wednesday morning, around 29 basis points' worth of cuts have been priced in for December, and economists advise caution due to the November uptick in negotiated wage growth.

Inflation in the headline rose above the target in November, reaching 2.3% from 2% in October, while the euro zone economy experienced its fastest growth in two years in the third quarter, despite a slow pace of 0.4%.

On Monday, Sylvain Broyer, the chief EMEA economist at S&P Global Ratings, stated on CNBC's "Squawk Box Europe" that there is no need to rush at this stage for the ECB.

"If labor costs rise above productivity, the ECB should remain cautious or wait-and-see before cutting rates, as inflation is currently under control only in the short term."

Broyer predicted that the Federal Reserve is likely to cut interest rates by 25 basis points in December, followed by a rapid pace of rate reductions to achieve a neutral monetary policy that neither hinders nor boosts economic growth.

'Heavy lifting'

The ECB is predicted to make 25-basis-point cuts at all six of its meetings in 2025, resulting in a key rate of 1.5% from 3%.

According to a Tuesday note from researchers at Danske Bank, ECB policymakers will discuss a 50 basis point cut at the December meeting, but will ultimately opt for a smaller reduction.

Even if ECB President Christine Lagarde changes her messaging to be more dovish, they anticipate a "benign market reaction."

Bank of America Global Research revised its forecast for rate cuts, predicting a pace that would lead to a 1.5% interest rate by September, instead of 2% by June next year.

According to BofA strategists, with an economy expected to grow at or below trend for most of 2025, it will be challenging for the ECB to miss a meeting until the deposit facility falls below the neutral rate (2%) to the level that BofA strategists see (1.5%).

The geopolitical backdrop is a key reason for these more dovish 2025 outlooks.

ING Research's global head of macro, Carsten Brzeski, predicts that the ECB will face a year of "heavy lifting" to support euro zone growth, while political instability in Germany and France causes bond yields in these key regions to rise.

Trump's policies of cutting taxes, deregulating, and attracting investment from Europe could harm the euro zone economy more than tariffs, according to Brzeski. However, macro forecasts, including Brzeski's, are uncertain about what specific policies Trump will implement.

According to Brzeski, Southern European economies will experience growth from post-pandemic tourism, and they won't have to compete with Chinese manufacturing. However, the first half of the year will be politically stagnant in Germany and France.

The potential upside surprise for the euro zone could be a delayed impact from the recent growth in real incomes and savings, providing strong support for the economy across 2025, Brzeski predicted. However, his downside "bold call" foresees Europe lurching toward its own protectionist measures as a backlash to Trump's provisions, "plunging global goods trade into a full-blown trade war."