ECB Interest Rate Cut and US Trade Tariffs Impact: The European Central Bank (ECB) is widely expected to reduce interest rates by 25 basis points on Thursday. This move would bring the deposit facility rate down from 3% to 2.75%, its lowest level since February 2023.
Inflation is nearing the ECB’s 2% target, and economic growth remains sluggish, prompting further monetary easing. However, new US trade tariffs could complicate ECB decision-making by adding uncertainty to the economic outlook.
Analysts Predict More Rate Cuts in 2025
Economists project additional ECB rate cuts in 2025 if growth remains subdued. Goldman Sachs economist Sven Jari Stehn expects a further 25 basis point reduction in March, with rates possibly falling to 1.75% by July.
ING analyst Francesco Pesole believes a dovish tone from the ECB will pave the way for lower eurozone rates. Similarly, Bank of America forecasts consecutive rate cuts in January and March, predicting rates could drop to a terminal level of 1.5% or lower.
Despite this outlook, Bank of America economist Ruben Segura-Cayuela cautions that core inflation volatility might delay additional cuts beyond March. He also noted that inflation data for January, due after Thursday’s meeting, could influence future decisions.
ECB policymakers speaking at Davos highlighted divergent inflation trends in the US and eurozone, with European inflation risks appearing less pronounced. Energy price increases have not significantly raised concerns among ECB officials.
US Trade Tariffs Add Pressure to ECB Policy
US trade tariffs could pose a significant risk to the eurozone’s economic outlook. Reports suggest that US Treasury Secretary Scott Bessent plans to introduce a universal tariff starting at 2.5%, with potential monthly increases to 20%.
President Donald Trump has signaled support for broader tariffs, targeting sectors such as steel, copper, and semiconductor chips. These measures could reduce European exports to the US, particularly in industries like machinery and pharmaceuticals, potentially weakening eurozone growth.
The euro fell to 1.0430 against the dollar after the tariff announcement, reversing gains made following a Wall Street selloff. Analysts, including ING’s Pesole, warn that continued tariff uncertainty could keep the euro under pressure.
Inflation Risks and Economic Impact of Tariffs
Higher US tariffs might have a mixed impact on eurozone inflation. While some argue tariffs could increase import costs and inflation, others foresee a deflationary effect from weaker global trade and commodity prices.
Banque de France Governor François Villeroy de Galhau downplayed inflationary risks, stating that US tariffs are likely to affect US prices more than those in Europe. ABN Amro economist Bill Diviney echoed this view, suggesting that tariffs may reduce the ECB policy rate to 1%.
Although tariffs could slightly raise prices, Diviney argued their broader impact would be deflationary, due to reduced global trade and weaker commodity demand. This dynamic supports the case for continued ECB rate cuts as policymakers navigate a challenging economic environment.
ECB Interest Rate Cut and US Trade Tariffs Impact –