The European Central Bank is anticipated to commence its 2025 meetings with another interest rate cut on Thursday, diverging from the Federal Reserve. Money markets suggest a 35 basis points rate cut for the January meeting, indicating a quarter-percentage point reduction. This would mark the fifth cut since the bank began easing monetary policy in June 2024, bringing the deposit facility rate to 2.75%.
Market expectations hint at further cuts in March and June, with a final reduction to 2% by year-end. Despite a slight increase in euro area inflation in December, concerns persist due to weak business activity indicators and tepid consumer confidence. Economists forecast a modest 0.1% GDP growth in the fourth quarter.
Questions remain about the ECB’s divergence from the Federal Reserve’s monetary policy path. ECB President Christine Lagarde may address these concerns during the post-announcement press conference. The U.S. economic growth contrasts with the eurozone’s stagnation, leading to differing inflationary pressures.
The ECB emphasizes its focus on domestic inflation and growth, willing to act ahead of the Fed. Policy differentials impact foreign exchange rates, potentially strengthening the U.S. dollar. A weaker euro could prompt cautious rate cuts, while the possibility of trade wars initiated by President Trump may necessitate further ECB cuts.
Trade tensions could disrupt global supply chains, leading to inflation and warranting higher interest rates. The ECB may consider a half-point rate cut to safeguard eurozone growth amidst political uncertainties. Economists forecast a fall in rates to 2.25% this year, considering potential impacts of Trump’s tariffs on inflation forecasts.
