ECB WATCH: ECB Set For Cut As Tariffs, Defence, Add To Risks
MNI (ROME) - The European Central Bank is set to lower its deposit rate by 25 basis points to 2.5% on Thursday, cutting for a fifth consecutive meeting and for the sixth time since June 2024, while President Christine Lagarde will flag uncertainty stemming from U.S. tariffs and the fiscal risks of a Europe facing a steep increase in defence spending.
The ECB is also likely to adjust the reference in its statement to policy restrictiveness as the deposit rate moves further into the range of some of the higher estimates of neutral, but to avoid saying that rates are no longer restrictive. (See MNI SOURCES: ECB Likely To Tweak Language, Keep "Restrictive" )
It is unclear whether the ECB will refer in its statement to the fiscal impact of a likely hefty increase in eurozone defence spending, after comments by Bank of Greece Governor Yannis Stournaras that the central bank could play a role in facilitating the military spend. European governments are also reportedly moving closer to the idea of seizing EUR200 billion in Russian assets held in Euroclear, a move which Lagarde has previously argued would violate international law.
TARIFFS AND DEFENCE
Tariffs and increased fiscal expenditure could combine negative supply shocks with positive demand shocks, which some officials will argue will bolster arguments for a more cautious monetary policy.
But a likely minor revision to the ECB’s projection for 2025 inflation to be announced on Thursday would be presented as a temporary blip on the way to the 2% target. It will mechanically reflect the somewhat stronger-than-anticipated price data of recent months and higher gas prices between projection rounds. (See MNI SOURCES: ECB To Revise 2025 Inflation Slightly Higher )
Markets will pay close attention to any signals regarding a further rate cut in April, as well as any indications over the ECB’s broader policy trajectory and factors shaping its assessment of the terminal rate. Executive Board members and other officials have downplayed the significance of neutral rate estimates in recent weeks, arguing that they are too imprecise to guide policy decisions. (See MNI INTERVIEW: Neutral Not Key To ECB Policy - Patsalides)