Rudolph Angler The European Central Bank (ECB) is expected to reduce interest rates by 25 basis points to 2.75% on Thursday. This marks another step in easing monetary policy as inflation nears the ECB’s 2% target and economic growth slows.
If confirmed, the deposit facility rate will decline from 3% to its lowest point since February 2023. While inflation and growth trends support lower rates, escalating US trade tariffs add new uncertainty for ECB decision-making.
Analysts Predict Further Rate Cuts in 2025
Goldman Sachs economist Sven Jari Stehn expects the ECB to cut rates again by 25 basis points at its March meeting. He also forecasts sequential cuts to 1.75% in July, citing subdued eurozone growth.
ING analyst Francesco Pesole believes that dovish ECB messaging could lead to additional rate reductions. Bank of America expects cuts in both January and March, predicting rates could reach as low as 1.5%.
However, Bank of America economist Ruben Segura-Cayuela warns that core inflation volatility could delay cuts beyond March. He describes the upcoming ECB meeting as potentially uneventful, as January inflation data will not be available until the following week.
ECB policymakers at the Davos summit acknowledged diverging inflation risks between the US and the eurozone. European inflation appears less severe, with policymakers downplaying upside risks from recent energy price changes.
US Trade Tariffs Add Complexity to ECB Policy
ECB President Christine Lagarde will likely face questions on Thursday about US trade tariffs’ potential impact on the European economy. Reports suggest US Treasury Secretary Scott Bessent is preparing a universal tariff starting at 2.5%, rising incrementally to 20%.
President Donald Trump expressed support for “much bigger” tariffs, targeting goods like steel, copper, and semiconductors. This news sent the euro down to 1.0430 against the dollar after briefly rising above 1.05 following a Wall Street selloff linked to China’s AI model, DeepSeek.
ING analyst Francesco Pesole predicts further euro weakness, with a potential drop below 1.040 if tariffs progress. BBVA notes that ongoing tariff uncertainty will likely drive volatility in currency markets.
Tariff Impact on Growth and Inflation
Higher US tariffs could reduce eurozone exports in key sectors like machinery and pharmaceuticals, potentially weakening economic growth. This scenario supports arguments for further rate cuts by the ECB.
However, tariffs’ impact on inflation remains unclear, especially if Europe retaliates or a weaker euro increases import costs. Banque de France Governor François Villeroy de Galhau stated that US tariffs might fuel inflation in the US but would minimally impact the eurozone.
ABN Amro economist Bill Diviney believes US tariffs would likely have a deflationary effect in Europe due to weaker global trade and commodity prices. He argues this strengthens the case for deeper ECB rate cuts, potentially bringing rates down to 1%.
These developments highlight the complex interplay between trade policy and monetary decisions, shaping the ECB’s outlook for 2025 and beyond.