European Central Bank Prepares for Meeting Amidst Economic Uncertainties
The European Central Bank (ECB) convenes on Thursday for its first gathering since Donald Trump resumed office. The impending threat of U.S. tariffs on the Eurozone's sluggish economy looms, potentially complicating its economic outlook.
Key Market Questions
1. Rate Cuts Expected: Most analysts anticipate a 25-basis point reduction in the key deposit rate to 2.75%. The ECB has signaled a willingness to keep rates accommodative, removing restrictive language from its guidance.
2. Impact of Trump's Trade Policies: Economists believe Trump's return has not significantly altered the ECB's assessment of tariff risks. However, the bank remains concerned about the potential impact of tariffs on Eurozone inflation, both directly and indirectly through demand.
3. Pace of Rate Cuts: The market expects approximately four rate cuts from the ECB this year, with some policymakers indicating rates could fall to 2%. However, some members express caution, emphasizing a need for thoughtful consideration of the pace and extent of rate reductions.
4. Inflation Outlook: Despite a rise in inflation to 2.4% in December, economists believe the ECB views it as temporary, largely driven by energy costs. The bank projects that wage growth will diminish, bringing services inflation down.
5. Impact of Fed Policy: The ECB could adjust its pace of rate cuts based on the actions of the Federal Reserve (Fed). If the Fed pauses rate cuts due to a strong U.S. economy, it could strengthen the Eurozone and reduce the ECB's urgency to stimulate growth.