The European Central Bank (ECB) is widely expected to cut interest rates again at today’s meeting, encouraged by figures earlier this week showing euro zone inflation at 1.9 per cent, just below its 2 per cent target. A quarter point cut in its key deposit rate is expected by the financial markets and any other outcome would be a big surprise. However, what will be particularly closely watched are new forecasts for inflation from the ECB and any comments from its president, Christine Lagarde, about the outlook.
Another cut in interest rates looks justified at a time when inflationary pressures and the euro zone economy both appear weak and investment sentiment is hit by uncertainty, mainly related to the policies of US president Donald Trump.
But indications from the ECB of what happens next may be limited, with Lagarde likely to stick to the line that it all depends on the data in the months ahead. While pointing to limited inflationary pressures, the ECB’s forecasts are also likely to caution about the difficulties of forecasting and remaining price pressures in some areas. Were the EU to respond to Trump’s tariffs with similar moves of its own on US imports, this could also push up inflation in the euro zone.
The rapid fall in ECB interest rates since they peaked at 4 per cent also means there may not be much further to go in terms of reductions. Borrowing costs may now be around what is called a neutral level, in other words one which neither stimulates nor restricts economic activity. More hawkish members of the policy-making governing council had already been cautioning about reducing interest rates further, even before today’s meeting. Their real target was probably to underline that after the deposit rate reaches 2 per cent, convincing reasons would be needed to reduce it further.
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The financial markets continue to anticipate further gradual reductions, albeit limited in scale. In a volatile economic environment, it is impossible to be certain, but ECB interest rates may now be coming close to their floor.
