ECB Set for Fifth Rate Cut as Inflation Nears Target

Frankfurt, January 2025 - The European Central Bank (ECB) is widely expected to lower interest rates for the fifth time on Thursday, as inflation approaches the 2% target, providing further monetary loosening to stimulate economic growth.

Unanimous Predictions

A consensus among analysts polled by Bloomberg indicates a unanimous prediction of a quarter-point reduction in the deposit rate, bringing it to 2.75%. However, the majority do not anticipate ECB President Christine Lagarde to commit to future rate cuts, despite signals from Governing Council members suggesting another cut in March.

Easing Monetary Policy

The ECB aims to revive economic growth amidst political uncertainty in the eurozone's largest member states, which has weighed on consumer and business confidence. The rate cut comes despite the Federal Reserve's reluctance to reduce borrowing costs. Both central banks remain concerned about the impact of President Donald Trump's economic policies on global trade and exports.

Forecasts and Projections

Economists expect the ECB to cut rates at each of its four policy meetings through June. However, market sentiment has shifted, with traders pricing in only three reductions in the first half of the year and a potential pause in April. Beyond that, there is a two-thirds probability of another rate cut by year-end.

Diverging Views

ECB officials have expressed varying opinions on the extent of rate cuts, suggesting potential tensions within the Governing Council. Dovish members favor bringing the deposit rate to 2% by June, while hawkish members remain hesitant.

Data and Economic Growth

The Governing Council will announce its decision at 2:15 p.m. CEST on Thursday, followed by a press conference with President Lagarde. A preliminary estimate of the eurozone's fourth-quarter performance is expected to show minimal growth due to a decline in Germany and stagnation in France. The outlook for Germany is also being revised down ahead of next month's election.

Trade Uncertainty

Despite Trump's threats of a tit-for-tat trade war, the global economy remains on edge. This uncertainty has impacted European growth, leading to weaker investment and a potential negative spiral.

Inflation

While the ECB expects a sharp slowdown in inflation in the coming weeks, core services prices remain a concern. Lagarde may face questions on the ECB's assessment of inflation risks, particularly in light of rising energy prices.