ECB to Face Tariff Threats and Rate Cut Speculation at Policy Meeting
London, Jan 23 (Reuters)
The European Central Bank (ECB) convenes on Thursday for the first time since President Donald Trump's return to office, with U.S. tariff threats casting a shadow over the eurozone's fragile economy.
Key Questions for Markets:
1. ECB's Rate Decision:
Markets anticipate a 25-basis-point interest rate cut, bringing the key deposit rate to 2.75%. The ECB removed guidance pledging to keep rates restrictive in December, signaling a shift towards further easing.
2. Impact of Trump's Tariffs:
Economists believe Trump's return has not yet significantly altered the ECB's view on tariff risks. However, the targeting of Canada, Mexico, and China raises concerns about possible trade retaliation against the EU. The ECB will monitor the impact of tariffs on eurozone inflation and demand.
3. Depth of Rate Cuts:
Traders expect four rate cuts from the ECB in 2020, with some policymakers suggesting levels near 2%. This would approach the estimated neutral rate, neither stimulating nor restricting growth. However, policymakers like Isabel Schnabel have expressed caution on the pace of cuts.
4. Inflation Outlook:
Inflation rose to 2.4% in December, the highest since July. The ECB anticipates the increase is temporary and expects slower wage growth to reduce services inflation. Chief economist Philip Lane warns that keeping rates excessively high could push inflation below target.
5. Fed Policy Implications:
The ECB may adjust its own pace of rate cuts based on the Federal Reserve's actions. If the Fed pauses cuts due to a strong U.S. economy, the ECB may follow suit. However, a "stagflation" scenario in the U.S. could impact the ECB's outlook and limit its room for further easing.