The ECB is expected to cut rates by 25bps to 2.75% on Thursday as inflation nears 2% and growth remains weak. Analysts see further cuts in 2025, but US trade tariffs could add uncertainty.
The European Central Bank (ECB) is widely expected to lower interest rates by 25 basis points on Thursday, easing monetary policy further as inflation trends towards the 2% target and economic indicators signal cooling momentum.
The deposit facility rate is anticipated to drop from 3% to 2.75%, marking its lowest level since February 2023.
Yet, while inflation and economic growth trends support lower interest rates, escalating US trade tariffs may introduce an element of uncertainty for ECB policymakers going forward.
Analysts see further ECB rate cuts in 2025
Goldman Sachs economist Sven Jari Stehn expects an additional 25 basis point cut at the ECB’s March meeting, with subsequent policy moves dependent on economic data. “We maintain our forecast for sequential cuts to 1.75% in July, given our projection of subdued growth,” he said.
ING analyst Francesco Pesole noted that “a reiteration of the broadly dovish message can pave the way for lower eurozone rates”.
Bank of America predicts the ECB will cut rates in both January and March, with rates potentially reaching a terminal level of 1.5% or lower, widening the monetary policy gap with the US Federal Reserve.
“It is a meeting that has high potential to be unspectacular, not least because January inflation data will only be released the following week,” said Bank of America economist Ruben Segura-Cayuela.
Despite expectations for back-to-back rate cuts, Segura-Cayuela warned of potential delays beyond March due to core inflation volatility.
ECB policymakers speaking in Davos acknowledged that inflation risks in the US and eurozone are diverging, with European inflation concerns appearing less severe. None of the ECB speakers highlighted upside inflation risks stemming from recent energy price moves.
Bank of America projects euro area fourth-quarter economic growth at 0.1% quarter-on-quarter, with Spain leading (0.5%), followed by Italy (0.2%), while France (-0.1%) and Germany (0.0%) lag behind.
Market participants expect four interest rate cuts by the ECB in 2025, with the deposit rate reaching 2% by the end of the year.
Trade tariffs pose new risk for ECB policy
ECB President Christine Lagarde is likely to face questions during Thursday’s press conference about the potential impact of US tariffs on the European economy.
On Monday, reports emerged that US Treasury Secretary Scott Bessent is preparing a 2.5% universal tariff, with incremental monthly increases up to 20%, allowing time for businesses to adjust and countries to negotiate with the new US administration.
President Donald Trump indicated that he favours “much bigger” universal tariffs and is considering duties on a broad range of goods, from steel and copper to semiconductor chips.
The euro, which had briefly strengthened above 1.05 against the dollar following a Wall Street selloff triggered by China’s open-source AI model DeepSeek, fell to 1.0430 as the tariff news emerged.
“Volatility is likely to continue, and in the short term, the tariff noise is a key driver,” said BBVA in a note on Tuesday.
“The tariff threat may be perceived more seriously given the Treasury’s active planning, and that materially shrinks the upside potential for the euro,” said ING’s Pesole, adding that “a return below 1.040 is warranted at this stage”.
Trade tariffs and ECB policy outlook
Higher US tariffs on European imports could weigh on eurozone growth, as key sectors such as machinery and pharmaceuticals may see reduced exports to the US. In theory, this should reinforce the case for lower interest rates.
However, the inflationary impact of tariffs remains uncertain, particularly if Europe retaliates against US products or if a sharp euro depreciation leads to higher import costs, pushing inflation upwards.
Banque de France Governor François Villeroy de Galhau downplayed the inflationary risks, stating at Davos that US tariffs may fuel inflation in the US but would have little impact on the eurozone.
“We think US tariffs would have a disinflationary impact on the eurozone, even in the case that the EU retaliates,” said ABN Amro economist Bill Diviney.
He argued that, while tariffs may cause a slight rise in prices, their broader impact -through weaker global trade and lower commodity prices – would be likely to be deflationary.
“This is an important factor behind our view that the ECB policy rate will eventually be reduced to 1%,” Diviney added.
