European Central Bank to cut rates again with Trump threat and U.S. divergence in focus
The European Central Bank is widely expected to kick off its 2025 meetings with another interest rate cut on Thursday, as traders aim to gauge how far the central bank is willing to diverge from a stalled Federal Reserve.
Money markets on Wednesday were pricing in 35 basis points worth of rate cuts for the January meeting, indicating the euro zone's central bank will cut by at least a quarter-percentage point. That would take the deposit facility, its key rate, to 2.75% marking its fifth trim since it began easing monetary policy in June 2024.
Market pricing then suggests follow-up cuts at the ECB's March and June meetings, with a fourth and final reduction bringing the deposit facility to 2% by the end of the year.
Expectations for a swift pace of easing this year have solidified, even after headline euro area inflation increased for a third straight month in December. A slight uptick in the rate of price rises was expected due to effects from the energy market, while business activity indicators for the bloc show continued weakness in manufacturing and tepid consumer confidence. Economists polled by Reuters are expecting fourth-quarter growth figures to show GDP expanding just 0.1%, down from 0.4% in the third quarter.
While this week's ECB rate move is near guaranteed, several key questions remain that its president, Christine Lagarde, will likely be quizzed on during her post-announcement press conference — and many of those relate to the U.S. and its new leader.
One concern is whether the ECB is comfortable with the increasing distance between its own monetary policy path and that of the world's biggest central bank, the Federal Reserve, which is set to hold rates on Wednesday. Markets are pricing in just two