The European Central Bank (ECB) is expected to slash interest rates by 25 basis points to 2.25% on Thursday, marking its seventh cut in a year as it battles to insulate the eurozone economy from the US trade policy fallout, according to Reuters.
With President Donald Trump’s tariffs already sapping growth and market volatility intensifying, the move is aimed at cushioning a bloc teetering on the brink of stagnation.
The ECB’s decision follows mounting evidence that inflation, now at 1.9%, is firmly under control, while the eurozone’s growth prospects dim. Economists warn Trump’s tariffs could erase 0.5% from GDP, halving the bloc’s already modest 2024 expansion forecast.
Though the US has paused some levies, existing measures and financial market turmoil justify further easing, according to a Reuters poll of analysts. JPMorgan economist Greg Fuzesi said:
Cutting the deposit rate 25 basis points to the top of (the neutral) range should be straightforward given the huge uncertainty and the likelihood that the trade war is not just a supply shock but will also likely hit demand.
The euro’s 9% surge to record trade-weighted highs, coupled with plunging energy prices and China’s potential export dumping, risks deflationary pressures. Morgan Stanley projects inflation could dip below the ECB’s 2% target by mid-2024, remaining subdued into 2026.
While a rate cut is all but certain, ECB President Christine Lagarde is expected to avoid committing to future steps, reiterating that decisions remain “data-dependent”.
Key questions linger over Germany’s planned fiscal splurge under its new coalition government, which promises massive defence and infrastructure spending. Though Lagarde may sidestep queries on its impact, analysts warn such stimulus could force the ECB to reverse course.
For now, the ECB’s immediate challenge is navigating a perilous trade landscape. With Trump’s tariffs looming and eurozone exports under siege, Thursday’s cut may prove a fleeting respite in a protracted economic storm.
