FRANKFURT – The European Central Bank is widely expected to press on with lowering interest rates Thursday as regional growth concerns mount due to weak business activity, a situation that could be exacerbated by US trade sanctions.
An economists’ poll forecasts a 25-basis point cut in the bank’s key rates, which would bring the deposit rate to 2.50% and the refinancing rate to 2.65%.
Thursday’s rate cut is largely seen as a lock among analysts, with nearly all traders on the overnight swap market betting on a quarter-point reduction. The situation for April is less clear, with the market prognosis for lower rates next month currently at around 70%.
The ECB Governing Council is likely to mull whether this week’s update to its monetary policy will mean its key rates are no longer restrictive. Executive board member Isabell Schnabel recently stirred the pot by wondering aloud if current borrowing costs are truly holding back growth. Other officials were quick to note that monetary policy is in fact hindering business activity, thus underlining their support for more step-downs.
In the post-decision press conference, pressure will likely be on ECB President Christine Lagarde to identify when interest rates are no longer restrictive, ie when they will be at the neutral rate, which the bank said last month is between 1.75-2.25% for the deposit rate. If policymakers shave off another quarter point this week as expected, then one more such move would bring it within the bracket.
“We expect another 25bp rate cut, with the reference to the policy stance being restrictive removed,” SG Global Economics said in a note. “Should this reference remain, it would suggest that governors already foresee a further cut at the next meeting in April.”
Capital Economics said dissent over policy within the governing council is coming, which could mute signals from ECB headquarters in Frankfurt. “The bank’s messaging is likely to be more equivocal about the path of interest rates over the rest of the year. We expect it to drop the description of monetary policy as ‘restrictive’ and financing conditions as ‘tight’. In the press conference, President Lagarde might not give any further hints about the direction of interest rates.”
Price growth slows, Trump’s attacks increase
Policymakers got some good news earlier this week when the initial reading for February inflation in the currency area fell for the first time in five months. The decline to 2.4% was a tenth less than expected, but the core measure also dropped a tenth to 2.6%, and price growth continued to slow for services. This sector has been worrisome for ECB officials, but analysts noted that costs here were on the decline.
And that was about the extent of the good news. Sluggish growth in Germany, Europe’s largest economy, continues to drag on the currency area as a whole. Late last month, the German development bank KfW downgraded its domestic GDP forecast from an increase of 0.5% to a contraction of 0.2%, which was how the economy performed in 2024. Furthermore, it cut this year’s Eurozone growth expectations to 0.6% from 0.8%.
The ECB is scheduled to release new inflation and economic growth estimates on Thursday.
And the bank must also factor in whiplash-inducing policy changes coming out of Washington. The Trump administration has gone ahead with its trade sanctions on China, Canada, and Mexico, which makes his threats about starting 25% import tariffs on EU cars and other products next month even more credible These moves that would be a sure way to further hamper European growth. At the same time, it appears that the US is cosying up to Moscow, the ramifications of which are likely to go far beyond weapons deliveries to Ukraine.
That said, defence stocks jumped in the days after Ukrainian President Volodymir Zelensky was unceremoniously booted from the White House following his on-air spat with Trump and Vice President JD Vance. European capitals have since voiced their support for Zelensky’s cause by announcing plans to boost spending for Ukraine’s defence and their own as Trump seems ready to turn his back on Nato. How this all plays out for individual economies in the currency area remains to be seen, adding yet another variable to ECB policymaking.
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- Analysts expect key rates to ease 25bps
- Economic slowdown raises concerns
- Trump renews threats of tariffs on EU goods
- Officials divided on restrictiveness of rates
- Decision due Thursday at 13:15 GMT / 14:15 CET
- Press conference set for 13:45 GMT / 14:45 CET
By Eric Culp
European Editor, LiveSquawk News
@eculp.bsky.social
@EricCulpLS
5 March 2025 | 7:50 GMT
FRANKFURT – The European Central Bank is widely expected to press on with lowering interest rates Thursday as regional growth concerns mount due to weak business activity, a situation that could be exacerbated by US trade sanctions.
An economists’ poll forecasts a 25-basis point cut in the bank’s key rates, which would bring the deposit rate to 2.50% and the refinancing rate to 2.65%.
Thursday’s rate cut is largely seen as a lock among analysts, with nearly all traders on the overnight swap market betting on a quarter-point reduction. The situation for April is less clear, with the market prognosis for lower rates next month currently at around 70%.
The ECB Governing Council is likely to mull whether this week’s update to its monetary policy will mean its key rates are no longer restrictive. Executive board member Isabell Schnabel recently stirred the pot by wondering aloud if current borrowing costs are truly holding back growth. Other officials were quick to note that monetary policy is in fact hindering business activity, thus underlining their support for more step-downs.
In the post-decision press conference, pressure will likely be on ECB President Christine Lagarde to identify when interest rates are no longer restrictive, ie when they will be at the neutral rate, which the bank said last month is between 1.75-2.25% for the deposit rate. If policymakers shave off another quarter point this week as expected, then one more such move would bring it within the bracket.
“We expect another 25bp rate cut, with the reference to the policy stance being restrictive removed,” SG Global Economics said in a note. “Should this reference remain, it would suggest that governors already foresee a further cut at the next meeting in April.”
Capital Economics said dissent over policy within the governing council is coming, which could mute signals from ECB headquarters in Frankfurt. “The bank’s messaging is likely to be more equivocal about the path of interest rates over the rest of the year. We expect it to drop the description of monetary policy as ‘restrictive’ and financing conditions as ‘tight’. In the press conference, President Lagarde might not give any further hints about the direction of interest rates.”
Price growth slows, Trump’s attacks increase
Policymakers got some good news earlier this week when the initial reading for February inflation in the currency area fell for the first time in five months. The decline to 2.4% was a tenth less than expected, but the core measure also dropped a tenth to 2.6%, and price growth continued to slow for services. This sector has been worrisome for ECB officials, but analysts noted that costs here were on the decline.
And that was about the extent of the good news. Sluggish growth in Germany, Europe’s largest economy, continues to drag on the currency area as a whole. Late last month, the German development bank KfW downgraded its domestic GDP forecast from an increase of 0.5% to a contraction of 0.2%, which was how the economy performed in 2024. Furthermore, it cut this year’s Eurozone growth expectations to 0.6% from 0.8%.
The ECB is scheduled to release new inflation and economic growth estimates on Thursday.
And the bank must also factor in whiplash-inducing policy changes coming out of Washington. The Trump administration has gone ahead with its trade sanctions on China, Canada, and Mexico, which makes his threats about starting 25% import tariffs on EU cars and other products next month even more credible These moves that would be a sure way to further hamper European growth. At the same time, it appears that the US is cosying up to Moscow, the ramifications of which are likely to go far beyond weapons deliveries to Ukraine.
That said, defence stocks jumped in the days after Ukrainian President Volodymir Zelensky was unceremoniously booted from the White House following his on-air spat with Trump and Vice President JD Vance. European capitals have since voiced their support for Zelensky’s cause by announcing plans to boost spending for Ukraine’s defence and their own as Trump seems ready to turn his back on Nato. How this all plays out for individual economies in the currency area remains to be seen, adding yet another variable to ECB policymaking.
Sign up for LiveSquawk and receive a discount with the code LSQEC$