① The European Central Bank will hold its first policy meeting of 2025 from January 29 to 30, with the market expecting the main deposit rate to be lowered by 25 basis points to 2.75%; ② The tariffs from the Trump administration may bring more uncertainty to the Eurozone economy, but the impact of the tariffs has not yet reached Europe; ③ The European Central Bank is expected to cut interest rates four times this year, but is cautious about the pace of rate cuts while paying attention to rising inflation concerns.
On January 27, the Financial Association reported (Editor: Zhou Ziyi) that the European Central Bank will hold its first policy meeting of 2025 this week (January 29 to 30), which is also the first monetary policy meeting of the European Central Bank since President Trump took office.
Traders believe that further rate cuts are a given, so the question is whether the European Central Bank will provide any new hints about the future path. Oddo Chief Economist Bruno Cavalier stated, "The door for further rate cuts is open."
However, the Trump administration is expected to bring more uncertainty to the Eurozone. Currently, under the threat of tariffs from the new U.S. government, the already weak economy of the Eurozone may become even more complicated.
Here are five key questions that the market is very concerned about:
What will the European Central Bank do this week?
According to general market expectations, the most likely scenario is that the European Central Bank will lower the main deposit rate by another 25 basis points to 2.75% (currently at 3%) at this week’s meeting.
In its policy guidance last December, the European Central Bank abandoned the wording that the policy would "remain sufficiently restrictive for as long as necessary."
Frederik Ducrozet, the head of macroeconomic research at Pictet Wealth Management, stated, "Since last December, the prospects for interest rate cuts this month have seen virtually no change."
Trump's return; what is the European Central Bank's view on tariff risks?
So far, economists believe Trump's tariffs have not yet impacted Europe.
President Trump did not impose tariffs on Europe on his first day in office, stating that the USA is not yet ready for comprehensive tariffs. This more cautious approach than expected has reassured Analysts, but this situation may not last.
Currently, Trump has targeted countries such as Canada and Mexico, and has complained about trade terms with the EU. Last week, Trump stated via video at the Davos World Economic Forum that if other economies produce goods anywhere outside the USA, they will face tariffs.
For the European Central Bank, the most important aspect is how tariffs affect inflation in the Eurozone, whether directly or through impacts on demand.
However, Lagarde stated last week that the European Central Bank is not "overly concerned" about Trump's policy of exporting inflation to Europe.
European Central Bank Governing Council member Francois Villeroy de Galhau also pointed out that any tariffs that the USA may increase are not expected to significantly alter Europe's inflation outlook, with the risks of price increases and economic growth "shifting towards the downside."
How much does the European Central Bank need to cut interest rates?
According to traders' general expectations, the European Central Bank is expected to cut rates four times this year, and some policymakers have already clearly expressed agreement with this view, that the interest rate will be lowered to the neutral range of 2%, which neither restricts nor stimulates economic growth. Lagarde stated last week that the neutral level is between 1.75% and 2.25%.
According to a survey conducted last week, the economists surveyed maintained their forecast that the European Central Bank will cut rates four times by 25 basis points in 2025, only with disagreements appearing regarding the timing of the rate cuts after April.
Danske Bank A/S Sponsored ADR's Chief Analyst Piet Christiansen said, "The decisions for January and March are basically set in stone... we are focusing on the April meeting, which is expected to become the 'battlefield' by that time."
Senior Economist David Powell from the Eurozone believes, "The European Central Bank will cut interest rates by a total of 100 basis points this year. However, after March, the pace of easing may shift to a quarterly action."
At the same time, some hawks within the European Central Bank are also very cautious about the pace of rate cuts. European Central Bank Executive Isabel Schnabel recently warned that the central bank needs to "think deeply" about the magnitude and speed of the reductions.
PIMCO's portfolio manager Konstantin Veit also pointed out that once the interest rate falls to 2.5% (a drop of 50 basis points from the current level), policymakers will have to consider the direction more carefully. At the same time, Viet added that given the region's economic weakness, interest rates could potentially fall to 1.75%.
Concerns about rising inflation.
Driven by rising Energy prices and service sector costs, the inflation rate in December last year rose to the highest level since July, at 2.4%. The inflation rate in the service sector remained unchanged at 4%.
However, economists believe that concerns about rising inflation are not very serious, and this growth actually meets the central bank's expectations.
The European Central Bank's chief economist, Philip Lane, believes that wage growth is slowing down and will soon bring down service sector inflation. He also warned that keeping interest rates at excessively high levels for too long could push inflation below the target.
Piet Christiansen, the chief strategist at Danske Bank A/S Sponsored ADR, stated that while the European Central Bank's target is close to 2% inflation, 'it's not as simple as a single task because if you want to see inflation still moving in the right direction, then a rebound is very normal.'
*What if the Federal Reserve stops cutting rates?**
Economists believe that if the Federal Reserve stops cutting rates, the European Central Bank may also slow down its reduction pace, but this depends on the specific reasons.
Due to the uncertainty surrounding the inflation outlook in the USA, traders' bets on Federal Reserve rate cuts changed in January. Among them, Bank of America and BNP Paribas expect the Federal Reserve to remain unchanged this year.
Ducrozet from Pictet Wealth Management stated, 'If the Federal Reserve stops cutting rates due to a strong economy, then this would also be good news for Europe.... The European Central Bank may actually tend to reduce the rate cut magnitude.'
Ducrozet added, "If they do not cut interest rates due to stagflation, that is another matter, but I believe it would not have much impact on the European Central Bank either."
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