The European Central Bank(ECB) plans a 25-basis-point interest rate cut to 2.75%, citing weak economic growth and inflation nearing its 2% target. Analysts predict further cuts in 2025, while US trade tariffs add uncertainty to eurozone policy decisions. Market volatility persists as challenges grow.
The deposit facility rate, expected to drop from 3%, will reach its lowest level since February 2023. Analysts believe this rate cut aligns with the ECB’s strategy to boost the economy and maintain inflation control.
US trade tariffs, however, introduce new challenges for policymakers as they assess future economic risks.
Analysts Predict Additional Rate Cuts in 2025
Goldman Sachs economist Sven Jari Stehn forecasts another 25-basis-point reduction during the ECB’s March meeting. He expects rates to decline to 1.75% by July due to subdued growth projections.
ING analyst Francesco Pesole noted that a dovish ECB stance could prepare markets for lower eurozone rates. Bank of America predicts consecutive rate cuts in January and March, with terminal rates potentially reaching 1.5% or lower.
Economist Ruben Segura-Cayuela from Bank of America warned that volatility in core inflation could delay rate cuts beyond March. He called the upcoming meeting “unspectacular,” as January inflation data will only be available the following week.
ECB policymakers at Davos highlighted diverging inflation risks between the US and Europe. While US inflation concerns persist, European energy price increases pose less risk, according to officials.
Trade Tariffs Add Complexity to ECB Policy Decisions
Reports of US Treasury Secretary Scott Bessent preparing a universal tariff have increased market uncertainty. The proposed tariffs, starting at 2.5% and rising monthly to 20%, would give businesses and countries time to adjust.
President Donald Trump indicated support for higher tariffs on goods like steel, copper, and semiconductor chips. As the news emerged, the euro dropped to 1.0430 against the dollar, reversing earlier gains from a Wall Street selloff linked to China’s AI model DeepSeek.
“Short-term tariff uncertainty will continue to drive euro volatility,” BBVA noted, while ING’s Pesole suggested the euro could dip below 1.040 as the tariff threat grows.
Trade Tariffs’ Inflationary Risks and Growth Impact
US tariffs could harm eurozone exports in machinery and pharmaceuticals, further slowing growth and supporting lower ECB interest rates. However, the inflationary effects of tariffs remain unclear.
If Europe retaliates or if the euro weakens sharply, higher import costs could push inflation upward. Banque de France Governor François Villeroy de Galhau stated at Davos that US tariffs would likely raise US inflation while minimally affecting the eurozone.
ABN Amro economist Bill Diviney argued that US tariffs could reduce eurozone inflation due to weaker global trade and lower commodity prices. “We expect the ECB policy rate to eventually fall to 1%,” Diviney stated, highlighting the broader deflationary impact of tariffs on Europe.
