The European Central Bank (ECB) will likely reduce interest rates by 25 basis points to 2.75% on Thursday. Analysts expect this decision as inflation nears the ECB’s 2% target and economic growth remains subdued.
This cut would lower the deposit facility rate from 3%, marking the lowest level since February 2023. Policymakers aim to further ease monetary policy to support the struggling eurozone economy.
However, US trade tariffs could complicate the ECB’s strategy. Rising tariff threats may introduce economic uncertainty, impacting future rate decisions.
Analysts Predict More ECB Cuts in 2025
Goldman Sachs economist Sven Jari Stehn anticipates another 25-basis-point rate cut in March, depending on economic conditions. “We forecast sequential cuts to 1.75% in July, assuming weak growth persists,” he stated.
ING analyst Francesco Pesole believes the ECB’s dovish approach supports lower eurozone rates. Bank of America expects rate cuts in January and March, with a terminal rate of 1.5% or below, further diverging from US monetary policy.
Still, potential delays loom due to volatile core inflation. Bank of America economist Ruben Segura-Cayuela noted that January inflation data, released after Thursday’s meeting, could impact future decisions.
ECB policymakers at Davos acknowledged diverging inflation risks between the US and Europe, with European inflation appearing less severe. Recent energy price shifts have not led to upside inflation concerns for Europe.
US Trade Tariffs Add Uncertainty to ECB’s Policy
The ECB must now consider new risks posed by US trade tariffs. Reports suggest the US Treasury plans to implement a 2.5% universal tariff, increasing monthly to 20%. Businesses will have time to adjust, while negotiations continue.
US President Donald Trump favors broader tariffs on goods like steel, copper, and semiconductor chips. This announcement weakened the euro, which fell from 1.05 to 1.0430 against the dollar.
“Short-term volatility will persist as tariff threats drive market sentiment,” ING’s Pesole commented. He noted that the euro could dip below 1.040 due to tariff concerns.
Higher US tariffs may reduce eurozone exports, particularly machinery and pharmaceuticals, weighing on growth and strengthening the case for lower rates. However, retaliatory EU tariffs or a weaker euro could push inflation higher, creating uncertainty for the ECB’s strategy.
Inflation and Long-Term Rate Projections
Economists hold differing views on the inflationary impact of US tariffs. Banque de France Governor François Villeroy de Galhau argued that tariffs would likely drive US inflation but minimally affect Europe.
“We believe tariffs will have a disinflationary effect in the eurozone, even with potential EU retaliation,” said ABN Amro economist Bill Diviney. He explained that weaker global trade and lower commodity prices would counter inflationary pressures.
Diviney expects the ECB to continue cutting rates, possibly reaching 1% long-term. Despite uncertainties, the ECB’s focus remains on sustaining growth and ensuring price stability amid evolving economic challenges.
