Ahead of next week’s meeting, the European Central Bank (ECB) has made it clear that it plans to keep cutting rates, with little public debate or disagreement. ECB President Christine Lagarde has strongly suggested a 25bp rate cut is likely, and that the rate cuts will continue, even with higher inflation.
Despite rising inflation, the ECB is focusing on easing rates due to worries about slow growth and the chance that inflation could fall too much in the future. The minutes from the ECB’s December meeting showed a shift toward a more cautious approach, indicating that more cuts are needed to meet their growth and inflation goals.
At 3%, the current deposit rate is still seen as too high for the eurozone’s weak economy. The recent rise in bond yields has also made financial conditions tougher, which makes more rate cuts seem necessary. While some believe monetary policy can’t fix the region’s deeper problems, political instability across the eurozone will likely force the ECB to act.
As inflation is expected to ease later in the year, the ECB is likely to overlook the short-term rise in inflation and aim to bring rates down to neutral levels (around 2.5%). If the eurozone economy stays weaker than expected, further cuts may be unavoidable. Overall, the ECB seems set on lowering rates as needed to support the economy.
