The European Central Bank (ECB) is widely expected to cut interest rates on Thursday, with policymakers keeping the door open for additional easing, according to Reuters.
The move follows four rate cuts in 2023, with three to four more anticipated in 2025, as the ECB aims to combat the eurozone’s industrial recession and weak consumption. The case for a 25-basis-point reduction in the 3% deposit rate is so compelling that none of the ECB’s 26 policymakers have publicly opposed it, suggesting a potential unanimous decision.
This comes despite the US Federal Reserve’s decision to hold rates steady and signal a prolonged pause, citing uncertainty from looming US tariffs. Meanwhile, ECB President Christine Lagarde is expected to avoid explicit commitments to future cuts but will likely reiterate that the policy direction remains clear.
Inflation, which rose to 2.4% in December, is projected to gradually ease back to the ECB’s 2% target. The outlook is backed with factors such as moderating wage growth, a softening labour market, and stabilising oil prices.
Challenges ahead
As the ECB embarks on its easing cycle, maintaining consensus among policymakers may become increasingly difficult. The debate over where rates should ultimately settle is already underway, with some suggesting a “neutral” rate of 1.75% to 2.50%. However, external factors, such as potential trade wars triggered by US President Donald Trump’s policies, could complicate the ECB’s path.
Trump’s recent call for the Fed to cut rates and his threats of tariffs have added volatility to the global economic landscape. Any escalation in trade tensions could weaken growth and push inflation higher, potentially forcing the ECB to consider more aggressive stimulus measures.
The eurozone also faces significant headwinds, including cautious consumer spending, shrinking industrial output, and stagnant exports. While inflation remains above target, structural issues like labour shortages and poor productivity growth could sustain price pressures, limiting the ECB’s ability to cut rates too deeply.
ECB board member Isabel Schnabel hinted at an upcoming debate on the limits of rate cuts, signalling that the bank was approaching a critical juncture in its monetary policy strategy.
However, analysts warn that downside risks to growth, particularly in the wake of the US election, could push the ECB to consider even lower rates. As the ECB navigates these challenges, its ability to balance growth support with inflation control will be crucial in shaping the eurozone’s economic trajectory in the coming months.
