市場分析

ECB Faces Tough Choices Ahead: Five Key Questions

Amos Simanungkalit · 03 Mar49.8K 閱讀

Image Credit: Reuters

The European Central Bank (ECB) is expected to lower rates again on Thursday, but there is growing uncertainty among investors about the future direction of monetary policy.

U.S. tariff risks are escalating, while the ECB faces additional challenges, including the impact of a new German government, a potential ceasefire in Ukraine, and an anticipated increase in defense spending. At the same time, policymakers are becoming more divided on the pace of rate cuts after five reductions since June.

Zurich Insurance Group’s chief market strategist, Guy Miller, noted that the ECB is no longer on “automatic pilot,” continuously cutting rates at each meeting.

Here are five key questions facing markets:

What will the ECB do on Thursday? It’s expected the ECB will cut its key rate by another 25 basis points to 2.50%. The focus will also be on the assessment of financing conditions, as this could offer hints about the rate outlook beyond March. Analysts are also looking for any comments on the recent ECB payment systems outage.
Will rate cuts continue after March? Markets expect further rate cuts, but the path forward looks uncertain. Traders predict just under 90 basis points in cuts by year-end, with the rate possibly reaching 2% or even 1.75%. While most policymakers agree on the eventual cuts, the speed of those reductions is becoming a point of debate. Some suggest a pause in April, but inflation, particularly in services, is showing signs of improvement, which may lead to further cuts.
How will the ECB assess the impact of tariffs? Currently, only a 10% U.S. tariff on China has been implemented, so the ECB hasn't yet factored the impact of tariffs into its policy decisions. Trump’s upcoming 25% tariff on steel and aluminum imports, along with potential tariffs on European cars and goods, could shrink the European economy by 0.4%, according to the Kiel Institute. The ECB is expected to wait until April to evaluate the full impact.
What would a Ukraine ceasefire mean for the ECB? A ceasefire in Ukraine could have a modest positive effect on the economy and lower energy prices, but experts believe tariffs will have a more significant impact on the ECB’s decision-making. Increased defense spending in Europe could also influence ECB policy, with some expecting fewer rate cuts due to higher public spending.
What will the latest ECB projections show? The ECB is likely to downgrade its growth projections for 2024, following lower-than-expected growth in its December forecasts. However, with rising energy prices since the last update, inflation projections for this year may see a slight upward revision.