ECB Expected to Cut Rates Again Amid Rising Debate on Pausing

FRANKFURT, Germany, 3rd March 2025 (BSS/AFP) – The European Central Bank (ECB) is widely expected to reduce interest rates once more this week as part of efforts to rejuvenate the ailing eurozone economy, even as internal debate intensifies on when to halt the cuts.

This move will mark the ECB’s sixth rate reduction since June 2024, with a shift in focus from controlling inflation to alleviating the economic strain on the 20 countries using the euro.

With “growth faltering,” analysts at HSBC have suggested that a quarter-point cut at Thursday’s meeting is “a near certainty.”

If implemented, this reduction would bring the ECB’s benchmark deposit rate down to 2.50 percent.

The rate had peaked at a record 4 percent in late 2023 after the ECB initiated an unprecedented cycle of rate hikes to curb soaring energy and food costs triggered by Russia’s invasion of Ukraine.

However, attention is now turning to ECB President Christine Lagarde’s signals regarding a potential pause in the rate cuts, following comments from some officials suggesting it may be time to start considering such a move.

Market expectations indicate that the ECB will gradually lower the deposit rate to around 2 percent by the end of 2025 to support a eurozone economy that has shown increasing signs of fragility.

Rate Debate:
Some policymakers are now questioning how far the ECB should continue its downward rate trajectory.

Isabel Schnabel, a key member of the ECB’s board, told The Financial Times last month that the central bank may soon reach the point where it needs to “pause or halt” the cuts. She added, “We can no longer say with confidence that our monetary policy is still restrictive.”

Meanwhile, Pierre Wunsch, a member of the ECB’s rate-setting governing council and Belgium’s central bank governor, warned against “sleepwalking” into further reductions.

Uncertainty surrounding the potential effects of US President Donald Trump’s policies is also clouding the eurozone’s outlook. Some are concerned that tariffs on EU goods could hinder growth, while others fear a broader trade war might reignite inflation.

Inflation in the eurozone has already crept up, reaching 2.5 percent in January, although ECB officials remain confident that it will return to the central bank’s target of 2 percent later this year.

In contrast, the Federal Reserve in the United States recently paused rate cuts, responding to a rise in inflation and uncertainty about Trump’s policy direction.

Despite some members of the ECB pushing back against further easing, analyst Carsten Brzeski of ING bank pointed out that many others with a “dovish” stance continue to advocate for continued rate cuts.

Most analysts do not anticipate Lagarde, who maintains that the central bank will continue its decisions “meeting-by-meeting,” to offer clear guidance on a potential pause.

Poor Outlook:
On Thursday, the ECB is also set to release updated economic forecasts.

While inflation predictions are expected to remain stable, economists anticipate that the central bank may lower its growth projections for the eurozone in the coming years. The region has only managed modest growth over the past two years, hindered by poor performance in its largest economies, Germany and France. This has left the eurozone lagging behind economic powers like the United States and China.

Despite France’s ongoing political instability, there is some hope that the recent German election could lead to a more stable government capable of enacting vital economic reforms.

Nevertheless, Brzeski noted that the bleak economic outlook might leave the ECB with little choice but to continue easing monetary policy.

“There remains a significant risk that the eurozone economy will underperform in the coming months,” he said, adding that this could compel the ECB to lower rates to at least 2 percent, regardless of their preferences.

As the eurozone grapples with economic stagnation, analysts and investors will be closely monitoring the ECB’s next moves and its strategies to navigate the evolving global and domestic challenges.