European Central Bank Interest Rate Cuts

Investing.com — The European Central Bank (ECB) is expected to continue its series of interest rate cuts until July, aimed at safeguarding the euro zone economy from potential U.S. tariffs, according to a majority of economists surveyed.

Economic Concerns

The economic plans of U.S. President-elect Donald Trump, which include a minimum 10% tariff on all imported goods, have raised concerns in financial markets, potentially straining the euro zone.

The ECB, led by Chief Economist Philip Lane, is tasked with balancing policy to avoid triggering a recession while controlling inflation. Recently, the inflation rate has increased, and the bank must manage this without further damaging the economy.

Political Instability and Economic Activity

The euro zone’s leading economies, Germany and France, are facing political instability and slow economic activity. In 2024, Germany’s economy contracted by 0.2%. A PMI survey indicates that the euro zone ended 2024 in a vulnerable state.

Interest Rate Cuts

The ECB’s Governing Council began its easing campaign in June 2024, executing four interest rate cuts throughout the year, with more expected in the coming months.

According to a poll conducted from January 10 to 15, all 77 economists predict a 25 basis point decrease in the deposit rate to 2.75% on January 30. A 60% majority expects three additional cuts by mid-year, reducing the deposit rate to 2.00%. The remaining 31 economists forecasted varied end-Q2 rates between 1.75% and 2.50%. Median poll predictions suggest the rate will hold at 2.00% until at least mid-2026.

Market Expectations

Markets have fully priced in a rate cut this month and anticipate approximately 90 basis points of reductions throughout the year. In contrast, the U.S. Federal Reserve is only expected to implement a single 25 basis point reduction by year-end amid rising inflation concerns.

The poll anticipates that growth across the 20-member currency union will be approximately 1.0% this year and 1.2% next year.

Recent inflation in the euro zone, recorded at 2.4% last month, is expected to be temporary. The poll suggests inflation will drop to the ECB’s 2.0% target in Q2 and remain around that level through Q2 of 2026.

However, when asked about future inflation, a majority of economists (20 out of 34) predicted it would be higher than anticipated.

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