The European Central Bank may cut interest rates again

The market generally expects that the European Central Bank will once again lower its key interest rate by 25 basis points to 2.50%. However, after frequently adjusting interest rates in the past few months, the policy path of the European Central Bank has become less clear.

Guy Miller, Chief Market Strategist of Zurich Insurance Group, said, "Interest rate cuts are no longer autonomous, and the European Central Bank no longer cuts rates every meeting

Divergent views on the European Central Bank's next interest rate cut

The market believes that interest rate cuts may continue after March, but the pace may slow down. According to market pricing, it is expected that the European Central Bank will cut interest rates by another 90 basis points by the end of 2025, reaching a level of 2%, and may even drop to 1.75%.

This interest rate cut path is in line with the neutral interest rate range estimated by the European Central Bank, which is 1.75% -2.25%.

However, some policy makers hold different views on the pace of interest rate cuts. Top hawkish figure Isabel Schnabel argues that it is debatable whether the European Central Bank will continue to maintain its tightening policy.

Some economists believe that due to the slowdown in wage growth, service inflation may improve in the future, thereby affecting the pace of interest rate cuts.

The impact of US tariffs on the European economy

At present, the European Central Bank has not included the 10% tariff imposed by the United States on China in its policy considerations. President Trump announced a 25% tariff on European steel and aluminum products and may impose "retaliatory" tariffs on all countries that tax the United States, which could lead to a 0.4% contraction in the European economy in the first year.

Although US tariffs will have a significant impact on the eurozone economy, it remains to be seen whether they will become a decisive factor in the European Central Bank's policy adjustments. Carsten Brzeski, the head of macroeconomics at ING, stated that the European Central Bank may need to wait until April to respond to tariff policies.

Market participants generally believe that the ceasefire in Ukraine may provide some economic support and lower energy prices to a certain extent.

However, Holger Schmeiding, Chief Economist of Berenberg, believes that the impact of the Ukrainian ceasefire on the European Central Bank's policy may be limited, while the impact of tariff policies may be more significant.

In addition, due to the passive situation of Europe in the Ukraine issue, the pressure on Europe to strengthen its defense is gradually increasing, which is expected to stimulate a large amount of public spending and may affect future interest rate decisions. Barclays Bank believes that more fiscal spending may lead to the European Central Bank reducing its pace of interest rate cuts.

The latest economic forecast from the European Central Bank

The European Central Bank expects growth by the end of 2024 to be lower than its December forecast and may lower its economic growth forecast for the third consecutive time. Considering the rise in energy prices, it is expected that the inflation forecast for this year may be slightly raised.

Editor's viewpoint: The future is full of uncertainty, and the market needs to remain vigilant

Against the backdrop of complex challenges facing the global economy, how the European Central Bank's monetary policy will respond to external economic changes is particularly crucial. The tariff risk, the situation in Ukraine, and the increase in European defense spending may become important driving forces for policy adjustments in the coming months. Investors need to pay attention to the upcoming economic data and policy movements of the European Central Bank, and flexibly respond to possible market fluctuations.