The ECB will deliver a 25bps cut in the deposit rate, taking it to 2.75% at its meeting on Thursday. The rate decision is released at 1315 GMT and a press conference, chaired by President Lagarde, follows at 1345 GMT. With much uncertainty about the new Trump administration’s trade policies, and ongoing stagnation in the majority of the eurozone, no new ECB monetary policy signals are expected on the outlook, with a measured meeting-by-meeting, data dependent stance likely.
The euro has bounced back modestly since President Trump’s inauguration. But a dovish-leaning ECB is expected and may not help shift the long-term downtrend seen in EUR/USD since topping out in September last year above 1.12.
Mixed data but common commentary
It’s been a slightly mixed picture coming into this meeting, with an expected uptick in annual headline inflation to 2.4% from 2.2%, core remaining steady at 2.7% and services inflation nudging higher to 4.0% from 3.9%. Policymakers were expecting this rise in price pressures and have said they will look through the uptick as they continue to expect a return to target in 2025.
Greater concern remains on the growth outlook even though the recent flash PMI data for January saw the composite move back into expansionary territory marginally above 50, with the private sector back in cautious growth mode after two months of shrinking. It is still growth in the German economy, as the heralded ‘engine of Europe’ which remains subdued, with a spotlight on next month’s election.
Regarding recent comments from members of the Governing Council, there has been little pushback on a 25bps cut this week, with nearly all known hawks touting a cut, given that policy is currently still viewed as restrictive.
Obviously, clouding the economic outlook at this stage is the looming threats of EU tariffs from the US administration with Trump declaring that the US will straighten out the deficit with the EU through tariffs or by the zone buying US oil and gas. At this stage, President Lagarde has refrained from drawing any conclusions from the prospect of tariffs on the EU, according to recent remarks at Davos last week. However, policymakers are fully aware of the downside risks to the growth outlook.
Market reaction
Looking beyond the upcoming meeting, markets see an additional 65bps of loosening by year-end with the terminal rate seen at around 2%. Lagarde is likely to be asked about where the neutral rate is during her press conference. A further deterioration in the growth outlook and a moderation in inflation could see pricing slip closer to 1.50-1.75%. Such levels could also come to fruition in the event of a more dovish Fed.
That means limited guidance is probable at this meeting, with risks to the growth outlook, especially due to the new US administration. Maintaining flexibility and adjusting policy gradually is the consensus call, so any big differences to this will be seized upon by markets.