FRANKFURT: The European Central Bank is all but certain to cut interest rates on Thursday and is likely to keep open the door to further policy easing as concerns over lacklustre economic growth supersede worries about persistent inflation.
The ECB lowered borrowing costs four times last year and three to four moves are anticipated in 2025, driven by arguments that the biggest inflation surge in generations is nearly defeated and the economy demands relief.
With the euro zone suffering through an industrial recession and weak consumption, the case for a cut is so clear that none of the ECB’s 26 policymakers have publicly pushed back.
That could mean a unanimous vote for a 25 basis point cut in the 3% deposit rate.
That’s even after the US Federal Reserve kept rates unchanged a day earlier and hinted at a lengthy pause, saying it was not in a hurry to cut again, in part because looming tariffs increased uncertainty.
While ECB President Christine Lagarde is unlikely to commit explicitly to more cuts, she is expected to repeat her long time guidance that the direction of policy is clear and the risk of a trade war with the United States could sap weak growth even more.
“I think the ECB is quite comfortable with the market pricing and financial conditions as priced by markets, in the grand scheme,” Danske Bank economist Piet Haines Christiansen?? said.
“The doves may have a preference for slightly easier conditions though, but I don’t think it’s a battle that they want to pick now, or actually be able to win,” Christiansen added.
Inflation, which rose to 2.4% in December, could still take a few months to ease back to the ECB’s 2% goal but there is little to challenge the narrative that all is on track.
Wage growth is easing, the labour market is softening, oil prices have come off early-year highs and the dollar’s relentless firming seems to have stopped for now.
ECB’s Stournaras sees rates approaching 2% by year end, Trump tariffs could speed cuts
A few voices are still likely to argue that pressure on services costs remains too high for comfort but that is more an argument for gradualism than for a pause.
Complications
But with a debate already starting on where the ECB’s rate cuts should end, consensus may be more difficult to maintain with each future cut.
New US President Donald Trump’s policies could make the environment more volatile.
His threatened trade tariffs could weigh on growth and any retaliatory measures by the European Union would risk pushing up inflation.
Trump last week demanded that the Fed cut interest rates but the bank resisted on Wednesday, arguing that inflation was still elevated and it was not in a hurry to cut borrowing costs, a signal taken by markets to suggest a longer pause may be ahead.
Any escalation of the war of words between them might rattle financial markets.
At 2.75%, the ECB’s deposit rate would be approaching the 1.75% to 2.50% range considered “neutral”, neither fuelling nor dampening economic activity. But any Trump-induced volatility could intensify calls for the ECB to go below this rate and start stimulating growth.
“Markets are pricing a terminal rate of around 2%, which remains broadly consistent with our estimates for a neutral policy rate for the euro area, Konstantin Veit at PIMCO said.
“Nevertheless, we see additional downside risks to euro area growth post US election and potential for lower terminal rates.”
A trade war would shake already weak confidence.
Consumers are saving up cash, industry is shrinking, governments have modest buffers to spend and exports - long the driving force behind growth - are barely expanding.
But inflation is still above the ECB’s target and poor productivity growth along with labour shortages could keep up price pressures, likely limiting just how far the bank can go.
Foreshadowing the upcoming debate on pausing, board member Isabel Schnabel, an outspoken policy hawk, said the ECB was getting closer to the point where it must debate how much more it can cut.
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