The European Central Bank (ECB) is expected to cut interest rates again this week in a bid to boost the floundering eurozone economy, even as debate heats up about when to hit pause.
It will mark the central bank’s sixth reduction since June last year, with its focus having shifted from tackling inflation to relieving pressure on the 20 nations that use the euro. With “growth stuttering”, a quarter-point cut at Thursday’s meeting “is a near certainty”, HSBC bank analysts said.
A reduction by a quarter percentage point would bring the bank’s benchmark deposit rate to 2.50%.
The rate reached a record of 4% in late 2023 after the ECB launched an unprecedented hiking cycle to tame energy and food costs that surged after Russia’s invasion of Ukraine.
But investors will be keeping an eye out for signals from ECB President Christine Lagarde that a pause might be on the horizon, after some officials said it was time to start discussing the matter.
Markets have indicated they expect the ECB to bring the deposit rate steadily down to 2% by the end of the year to support a eurozone economy that has showed increasing signs of weakness.
Some policymakers are starting to ask how the central bank should continue on the path downward.
Isabel Schnabel, an influential member of the ECB’s board, told The Financial Times last month that policymakers were getting “closer to the point where we may have to pause or halt our rate cuts”.
“We can no longer say with confidence that our monetary policy is still restrictive,” she said.
Meanwhile Pierre Wunsch, a member of the ECB’s rate-setting governing council and Belgium’s central bank chief, also warned against “sleepwalking” into making too many reductions.
Uncertainty about the potential impact of US President Donald Trump’s policies is also clouding the outlook.
Some are fearful that eurozone growth could be hit if he goes ahead with levying tariffs on EU goods, while others worry that a broad, disruptive trade war could reignite inflation.
Eurozone inflation has already ticked up in recent months, hitting 2.5% in January, though ECB officials have voiced confidence it will settle around the central bank’s two-percent target later this year.
In the US, where the economy is in more robust health than in the eurozone, the Federal Reserve paused rate cuts recently after inflation rose and amid uncertainty about the future direction of Trump’s policy.