And the European Central Bank (ECB) will be cutting interest rates to Eurozone banks this Thursday—probably by half a percent. This move breaks with the prevailing trend of monetary easing. This next decision is one of the most consequential yet. This would be the seventh straight cut since the ECB started this easing cycle in June of 2022. The central bank, led by President Christine Lagarde, will publish the interest rate decision at 12:15 GMT, followed by a press conference where Lagarde will address the media at 12:45 GMT.
Interest rates would be one of the most powerful tools available to the ECB, by giving them control over the economic conditions experienced across the Eurozone members. High rates often increase the cost to borrow, which can slow consumer spending and business investment. Reducing rates can make loans more affordable, boosting economic activity. The ECB’s deposit facility rate is 2.25% at present, and market watchers expect the deposit rate to be brought down to 2%.
There are a few things pushing the ECB towards another rate cut. Inflation in the Eurozone reached 1.9% in May’s preliminary reading, according to recent data. This figure, calculated using the Harmonized Index of Consumer Prices (HICP), is still a bit below the ECB’s target of close to 2%. Should inflation come close to or above this line, debates inside the ECB might become louder about what should happen next with monetary policy.
Curiously, though, the current economic climate has been hit hard by external pressures — most especially from U.S. trade policies. US President Donald Trump’s ongoing tariff threats have unexpectedly improved the near-term inflation outlook for the Eurozone, according to Carsten Brzeski from ING. He added that it is Washington’s erratic trade policy that has reduced the price of oil. This confluence of factors has allowed the Euro to appreciate against the US Dollar (USD). This strengthening has made imports into the Eurozone much cheaper, possibly exerting downward pressure on inflation as well.
Such initiatives make for a tricky backdrop as the ECB considers its own course of action.
Should the ECB cut rates again, it will have taken a larger stride towards the normalization of monetary policy. This move follows on the heels of significant long-term economic crisis. Bank of France governor François Villeroy de Galhau warned that “policy normalization in the Euro area is likely not finished.” Even assuming cuts continue at the current pace, there is a long road ahead. Until then, rates will not stabilize at levels that are consistent with achieving sustainable economic growth.
“Chances are high that the ECB’s staff projections will already show inflation dropping below 2% this year, roughly one year earlier than predicted in the March forecasts.”
Brzeski elaborated on what this could mean for the course of ECB policy, saying,
This mood belies a more risk averse conservatism dangerous for the central bank to adopt. A willingness to swerve amid great and wholly unpredictable global economic uncertainty.
The press conference post-rate decision will likely be a must-listen for all analysts and market participants. We know that economic conditions are moving at breakneck speed. President Lagarde’s views expressed over the course of the conference will be key to setting expectations for future monetary policy. If she is confirmed, the media will certainly shine a spotlight on her responses regarding inflationary trends. They will look at how outside forces such as trade wars might influence ECB policy directions going forward.
Brzeski also known a further layer of mystery to Lagarde’s answers, saying,
“Unless trade tensions return with a vengeance, our suspicion is that the ECB would like to stick to a wait-and-see approach over the summer.”
This sentiment reflects a cautious approach as the central bank navigates through unpredictable global economic uncertainties.
Looking Ahead
The press conference following the rate decision is expected to draw significant interest from analysts and market participants alike. With economic conditions evolving rapidly, President Lagarde’s insights during the conference will be critical in shaping expectations for future monetary policy. The media will likely focus on her responses to questions regarding inflation trajectories and how external factors, such as trade tensions, may influence ECB strategies moving forward.
Brzeski added an additional layer of intrigue regarding Lagarde’s responses, stating,
“Not only because we expect some questions on the World Economic Forum story and Lagarde’s personal ambitions to live in a house with a lake view – but also because of hints at what could come next.”