The European Central Bank (ECB) is widely expected to cut rates again on Thursday, but uncertainty over its future course has reached new highs. Investors are weighing intensifying U.S. tariff risks, a changing German government, a possible Ukraine ceasefire, and a surge in European defense spending.
1. What Will the ECB Do on Thursday?
The decision itself is straightforward: another 25 basis point cut, bringing the key rate down to 2.50%.
However, market participants will closely scrutinize how the ECB assesses financing conditions, which could provide hints about the rate trajectory after March. “It will be important to see if the statement reiterates that ECB policy is still restrictive or if we are more at a neutral stance,” said ING’s global head of macro, Carsten Brzeski.
Additionally, any comments on last week’s ECB payment system outage may attract attention.
2. Will Rate Cuts Continue After March?
Markets anticipate more rate cuts but expect a less predictable path ahead. Investors currently price in around 80 basis points of easing by year-end—three additional cuts to 2%, with a possibility of a fourth bringing rates down to 1.75%.
Despite this outlook, uncertainty looms. There is roughly a 60% chance of another cut in April, highlighting the market’s mixed expectations.
ECB officials are divided. Some, like top hawk Isabel Schnabel, question whether current policy remains restrictive, while doves like Portugal’s Mario Centeno warn that inflation could fall below target given economic weakness.
Data released Monday showed services inflation slowed to 3.7%, reinforcing expectations that wage growth—a key concern—will ease, potentially supporting further cuts.
3. How Will the ECB Assess Tariff Risks?
So far, only a 10% U.S. tariff on China has taken effect, with additional tariffs on Chinese goods, as well as measures against Canada and Mexico, set to start Tuesday. For now, the ECB is unlikely to adjust policy based on these.
However, U.S. President Donald Trump has announced a 25% tariff on European steel and aluminum imports starting March 12, with possible further tariffs on cars and other goods.
Germany’s Kiel Institute estimates these tariffs could shrink the European economy by 0.4% in the first year—a major hit considering the eurozone is only expected to grow 0.9% in 2025. ING’s Brzeski suggested the ECB will likely wait until April before adjusting its response.
4. What Would a Ukraine Ceasefire Mean for the ECB?
Markets generally see a Ukraine ceasefire as a positive for economic stability and lower energy prices. However, its direct impact on ECB policy is expected to be limited.
Berenberg’s chief economist Holger Schmeiding noted that tariffs pose a larger challenge than a ceasefire. However, the ongoing conflict has heightened European defense spending needs, with Germany alone potentially requiring 400 billion euros in military funding.
This increase in public spending could have mixed effects: Barclays suggests it could reduce the need for rate cuts, while Citi argues higher long-term borrowing costs may encourage more easing.
5. What Will the Latest ECB Projections Show?
Given weaker-than-expected growth at the end of 2024, analysts anticipate the ECB will downgrade its growth projections for the third consecutive time.
On inflation, rising energy prices since the last forecast may prompt a slight upward revision for 2025.
A Complex Path Forward
The ECB is set to cut rates again, but the trajectory beyond March remains uncertain. With global trade risks, European defense spending, and geopolitical shifts all in play, policymakers face a delicate balancing act in shaping the eurozone’s monetary policy outlook.
