ECB Meets Amid Looming Tariff Threats and Sluggish Economy
As the European Central Bank (ECB) convenes on Thursday, the euro zone’s economy remains sluggish, and U.S. tariff threats continue to cast a shadow over the region. With traders anticipating further rate cuts, the question on everyone’s mind is what hints the ECB will drop about its future plans.
Rate Cuts: A Done Deal?
Most analysts expect the ECB to cut the key deposit rate by 25 basis points to 2.75%, a move that has been fully priced in by markets. The ECB removed language from its guidance in December that had pledged to keep rates restrictive, and economists believe the outlook has not changed since then.
Trump’s Return: A Game-Changer for Tariff Risks?
Despite U.S. President Trump’s return to office, economists do not believe his policies will significantly impact the ECB’s thinking on tariff risks. Trump’s initial approach has been more measured than expected, but analysts warn that this could change. The ECB’s primary concern is how tariffs will affect euro zone inflation, both directly and indirectly through their impact on demand.
How Far Will the ECB Cut Rates?
Traders expect almost four rate cuts from the ECB this year, with some policymakers advocating for rates to fall towards 2%. This would put rates within estimates of the neutral rate, which neither restricts nor accommodates growth. However, some hawks are more cautious about the pace of rate cuts, warning that the bank needs to carefully consider how far and quickly to cut.
Inflation: A Cause for Concern?
The recent uptick in inflation is not seen as a major concern for the ECB. Inflation rose to 2.4% in December, driven by higher energy prices and costs in services. While the rise is in line with the bank’s expectations, economists believe wage growth is slowing and will quickly pull services inflation lower.
What If the Fed Stops Cutting Rates?
If the Federal Reserve stops cutting rates, the ECB could slow its cuts, depending on the reason. Traders’ Fed rate cut bets have swung in January given uncertainty around the U.S. inflation outlook. If the Fed doesn’t cut rates because the economy is strong in the U.S., it could be good news for Europe, and the ECB might be tempted to cut a little less. However, if the Fed doesn’t cut due to a stagflation scenario, it would be a different story, and the ECB’s approach would likely remain unchanged.
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