Frankfurt, Jan 30 (Reuters) - The European Central Bank is expected to lower interest rates on Thursday, with prospects for ongoing policy easing due to concerns about sluggish economic growth taking precedence over worries about persistent inflation.
The ECB reduced borrowing costs four times last year, and up to four more rate cuts are projected by 2025. The rationale behind these moves stems from the belief that the recent high inflation is abating while the economy is in need of support.
Given the euro zone's industrial downturn and weak consumer activity, there is strong consensus for a rate cut among the ECB's policymakers. It is anticipated that a unanimous decision will be made to lower the deposit rate by 25 basis points to 2.75%, the lowest since early 2023, following the recent U.S. Federal Reserve cycle.
Although ECB President Christine Lagarde is not expected to commit explicitly to further cuts, she is likely to emphasize the clarity of the policy direction and the potential risks posed by a trade war with the United States on already fragile growth.
Inflation is approaching the target in a more sustainable manner, the economic outlook remains challenging, while rates clearly remain in restrictive territory, remarked Nordea economist Jan von Gerich, adding that the process of normalization is not yet complete.
While inflation reached 2.4% in December and may take time to return to the ECB's 2% target, current trends suggest a consistent outlook. Wage growth is moderating, the labor market is weakening, and other factors like oil prices and the dollar's stabilization do not challenge the overall narrative.
Despite some concerns about service costs, which are still deemed high, the focus remains on a gradual approach rather than a halt to rate cuts. With discussions already ongoing about the depth of future cuts, achieving consensus may become increasingly challenging.
The introduction of President Trump's policies could introduce more volatility to the environment. His trade tariff threats could hinder growth, potentially leading to increased inflation due to retaliatory actions by the European Union.
At a deposit rate of 2.75%, the ECB would be nearing the "neutral" range, a level that neither boosts nor dampens economic activity. Amid potential Trump-induced market fluctuations, calls might intensify for the ECB to further reduce rates to stimulate growth.
There is a strong case to take official rates to the lower end of the range of estimates for neutral by mid-2025, with risks tilted towards the potential impact of trade frictions leading to considering even slightly lower rates, stated economist Antonio Villarroya at Santander CIB.
In a scenario marked by feeble domestic demand, uncertainty, and continued tight monetary policy, firms are likely to hold back on investments, potentially causing a contraction in the first half of 2025.
Inflation remains above the ECB's target, and constraints like poor productivity growth and labor shortages may limit the extent to which the bank can further reduce rates. ECB board member Isabel Schnabel, known for her hawkish stance on policy, pointed out that the ECB will soon need to address how much further it can cut rates.