The European Central Bank (ECB) is expected to cut interest rates by 0.25 percentage points on Thursday, bringing its key rate to 2.5%. However, policymakers are bracing for tougher decisions ahead, as global trade tensions, higher government spending, and geopolitical risks complicate the outlook for further rate cuts.
Markets have already priced in an additional 0.5 percentage points in cuts by year-end, but with the ECB approaching its so-called “neutral rate”—where monetary policy neither stimulates nor restricts growth—debate is intensifying over whether further cuts will be necessary. ECB President Christine Lagarde previously estimated this neutral rate to be between 1.75% and 2.25%, but some policymakers argue that rates may already be at a level where they are no longer restrictive.
Tariffs and fiscal spending could shift ECB policy
The uncertain global trade environment is a key concern. The US has already imposed tariffs on major trading partners, with the European Union likely to be targeted next. Analysts warn that trade restrictions could slow European exports, weaken the euro, and increase inflation by raising import costs.
Meanwhile, European governments are ramping up defence spending, particularly in Germany, where the likely governing coalition has proposed a reform of debt rules that could unlock up to €1 trillion in spending. The prospect of higher fiscal stimulus has strengthened the euro and led analysts to speculate that the ECB may be forced to slow the pace of rate cuts to avoid overheating the economy.
Disagreement growing within the ECB
Until now, the ECB has largely presented a united front on monetary easing, but internal divisions are becoming more pronounced. Hawks within the Governing Council argue that interest rates should not be lowered too quickly, particularly as higher spending across Europe could support economic growth. Others warn that rising unemployment and weak consumer confidence justify further rate cuts to prevent stagnation.
The ECB’s latest inflation and growth forecasts, due to be released alongside the rate decision, will be closely watched for any signals on future monetary policy moves.
Markets react as ECB signals cautious approach
Despite the expectation of further cuts, some analysts believe the ECB will soon slow or pause its easing cycle. Goldman Sachs expects at least two more cuts this year, but Citi analysts believe the ECB will aim to maintain flexibility, avoiding firm commitments on future rate reductions.
