Frankfurt (Germany) (AFP) – Despite US President Donald Trump’s sabre-rattling, the European Central Bank is set to press on with interest rate cuts Thursday as officials increasingly voice confidence that the fight against inflation is on track. The central bank hiked borrowing costs aggressively from mid-2022 to tame runaway energy and food costs, but is now bringing them back down as price rises slow and the eurozone economy looks weak. ECB policymakers are expected to cut their benchmark deposit rate by a further quarter point to 2.75 percent on Thursday, its fifth reduction since June last year.
Recent upticks in inflation — such as a jump to 2.4 percent in December, above the ECB’s two-percent target — have caused some jitters. But ECB officials have sounded upbeat that the battle to control the pace of price rises remains on course. “We are confident of seeing inflation at target in the course” of this year, President Christine Lagarde said in an interview with US broadcaster CNBC at the World Economic Forum in Davos.
The ECB announcement comes a day after the Federal Reserve paused its rate cuts after inflation in the United States ticked up, despite pressure from Trump to further lower borrowing costs. Felix Schmidt from Berenberg Bank was among economists predicting a fresh rate cut by the ECB Thursday, believing that inflation will ease in 2025. Falls “in energy prices in particular will push inflation towards two percent as the year progresses,” Schmidt said.
As high rates increasingly pressure households and businesses, the ECB’s focus is now firmly on supporting growth in the eurozone, which is languishing amid a manufacturing slowdown and tepid consumer demand. The poor performance of traditional European powerhouse Germany has weighed heavily, with the collapse of the government in Berlin and early elections adding to the uncertainty. Political turbulence in heavyweight France, where a new government took office in December following the ouster of its predecessor, is also muddying the outlook.
But the biggest question mark for 2025 is the return to the White House of Trump, who has threatened sweeping tariffs on all imports into the United States, including from the EU. Any new duties on EU exports to the world’s biggest economy could hit the eurozone hard, while the bloc is already under pressure. Trump “presents a risk,” said Berenberg’s Schmidt. The president, however, appeared to be using tariff threats towards the EU “more as a prelude to negotiations, which means that they can be averted by making certain concessions,” Schmidt said.
Lagarde is not expected to offer too many clues about the ECB’s next moves as she stays true to the central bank’s recent stance of making decisions based on the latest data. Most analysts, however, believe the ECB will cut rates at least at its next two meetings — on Thursday, and again in March. But what happens beyond that is “less certain,” said Stephanie Schoenwald, an economist at KfW Research, predicting the “unity” among ECB governing council members “could be over in the spring.” It was already easy to spot different views about how far to go with cuts and “what risks to European price stability emanate from US tariff policy,” Schoenwald said.
© 2024 AFP
