(Bloomberg) -- The European Central Bank is set to lower interest rates for a fifth meeting as inflation that’s nearing the 2% target lets officials further loosen the shackles on the economy.
Analysts polled by Bloomberg are unanimous in predicting a quarter-point reduction in the deposit rate, to 2.75%, on Thursday. A majority doesn’t expect President Christine Lagarde to formally commit to future moves, even as many of her Governing Council colleagues have flagged that another cut will probably follow in March.
The hope is that easing monetary policy will breathe life into an economy finding it hard to grow, particularly as political friction unsettles consumers and businesses in the euro zone’s two biggest member-states.
The push comes despite the Federal Reserve being less eager to trim borrowing costs. Both central banks fret about US President Donald Trump’s economic plans, with ECB policymakers balancing warnings that greater global trade stress could damp exports against lingering fears over services prices still rising at twice the 2% goal.
A rate cut this week “should be an easy decision for the Governing Council, as would another one in March,” said Evelyn Herrmann, European economist at BofA Global Research. “After that, things could get more interesting and possibly more controversial.”
The ECB will announce its decision at 2:15 p.m. in Frankfurt. Lagarde will host a press conference 30 minutes later.
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Interest Rates
Economists surveyed by Bloomberg still anticipate cuts at each of the ECB’s policy four meetings through June. Traders, however, have pared bets and are barely pricing three reductions in the first half, with a possible pause in April. Beyond that, they see a two-thirds chance of another step by year-end.
Officials have expressed diverging views on how far they’re willing to go, suggesting tensions may soon intensify. Doves including Greece’s Yannis Stournaras and France’s Francois Villeroy de Galhau are prepared to take the deposit rate to 2% by June — a scenario hawks like the Netherlands’s Klaas Knot aren’t currently willing to embrace.
Lagarde herself has largely stayed out of the debate.
“I leave it to them to sort of anticipate and play that game of so many at which pace,” she told CNBC last week in Davos. “My job as president of the ECB is to make sure that we apply the methodology properly, that we project as well as we can, that we take into account empirical data as well, that we use our judgment and we have to be very attentive to the rest of the world.”
On Thursday, she’s likely to stress that decisions will continue to be taken one meeting at a time, based on projections and data as they arrive.
Economic Growth
A first estimate of the euro zone’s fourth-quarter performance was published just hours before the outcome of the Governing Council decision on Thursday. It unexpectedly showed stagnation due to declining output in Germany and France.
While S&P’s latest poll of purchasing managers yielded a positive surprise, it still only portrayed an economy treading water at the start of 2025. The outlook for Germany is already being revised down before next month’s snap election, while risks to the latest ECB forecast for 1.1% expansion in the euro area this year are to the downside.
Since retaking office last week, Trump has yet to make good on his threat to suck the world into a tit-for-tat trade war, though the specter hangs over economies across the globe.
“Uncertainty is weighing on growth in the here and now in Europe,” said PGIM’s Katharine Neiss. “In an environment where firms could get slapped with punitive tariffs, it makes sense to delay investment plans. Weak investment, in turn, further weighs on Europe’s growth potential, risking a kind of negative spiral.”
The Governing Council had an opportunity to discuss the European Commission’s strategy to protect and strengthen the economy during a dinner on Tuesday with President Ursula von der Leyen. Reporters may ask Lagarde to share some of her notes.
Inflation
She’ll definitely face questions on how far away the ECB is from declaring victory over inflation. Policymakers were quick to dismiss December’s uptick to 2.4% as expected, even though they’ve stressed that services prices still offer reason to worry.
A sharp slowdown is anticipated in the coming weeks as “latecomers” — as Lagarde describes them — reprice insurance and other, similar contracts. But it’s yet to materialize, and a recent jump in energy prices has served as a reminder that plenty of upside risks remain.
Policymakers past and present meeting in Davos last week agonized about additional pressures from aging societies, technological change and fragmented geopolitics. In the meantime, economists — in a shift from previous months — are now more concerned that the ECB will overshoot, rather than undershoot, 2% in the medium term.
The Governing Council will probably have seen previews of the latest survey of professional forecasters and consumer-inflation expectations to help it better gauge such risks. Both reports will be published Friday, though Lagarde could reveal some highlights when she faces the press.
--With assistance from Alexander Weber, Mark Schroers, Joel Rinneby, Harumi Ichikura, William Horobin and Craig Stirling.
(Updates with euro-zone GDP in economics section. An earlier version of this story corrected the spelling of Davos in 10th paragraph.)
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