MNI ECB WATCH: ECB To Cut, Likely To Change Language
MNI (ROME) - The European Central Bank is expected to lower its deposit rate by 25 basis points to 3% on Thursday, in its third consecutive cut, and may also adjust its policy language to reflect the need to move closer to the so-called neutral rate.
The announcement will be accompanied by a fresh set of economic projections, expected to reaffirm the ECB’s confidence in the ongoing disinflationary process. While the projections are unlikely to differ significantly from those in September, they may indicate slightly lower inflation and growth for 2025. The ECB’s return to its 2% inflation target remains broadly anticipated between the first and second quarters of 2025.
The ECB will try to give an indication of its direction of travel in its easing cycle but will try to avoid being pinned down on its estimate of the neutral rate, with some officials seeing it below 2% and others close to 3%. Some Governing Council members are likely to advocate dropping the reference in the policy statement to keeping rates “sufficiently restrictive” until the inflation target is achieved. (See MNI SOURCES: ECB Closer To Dropping "Restrictive" Language)
Also on the mind of officials going into the meeting will be the impact of U.S. President-elect Donald Trump’s trade policies, and the danger of a chain of reciprocal tariff moves. But ECB officials have stressed that it will only be when Trump unveils details of his policies that the central bank will be able to properly assess their impact on both growth and inflation.
Concerns over weak economic growth and the risk of undershooting the inflation target are also mounting, with some national central bank governors calling for a bigger, 50-basis-point, rate cut, sources have told MNI. This is likely to be discussed, though a 25bp reduction remains a more likely outcome.
FRANCE AND GERMANY
The ECB decision will come against the backdrop of political crises in Paris and Berlin. In France, financial market nerves are fraying, with French bond spreads surpassing those of Spain and Greece and nearing Italian levels.
ECB President Christine Lagarde is likely to face questions about France’s political instability and whether the central bank’s Transmission Protection Instrument bond-buying programme might be deployed in the event of a deeper crisis.