The European Central Bank (ECB) is on the verge of implementing its eighth interest rate cut. Meanwhile, the hawkish camp within the bank is urgently advocating for a halt to preserve policy flexibility in anticipation of a potential future inflationary surge.
At 20:15 Beijing Time on Thursday, the ECB is widely expected to cut interest rates once again and keep all policy options open for its subsequent meetings. However, mounting pressure is building to pause the bank’s year – long cycle of monetary easing.
Past Rate Cuts and Current Economic Context
As inflation has subsided from its post – pandemic peak, the ECB has carried out seven interest rate cuts over the past 13 months. These moves aimed to prop up the already fragile eurozone economy, even before the region was further impacted by the turmoil in the US economy and trade policies.
With inflation steadily approaching the 2% target and several policymakers signaling support for a rate cut, Thursday’s decision is anticipated to pass without major controversy. Instead, the spotlight will be on the potential future policy signals that ECB President Draghi may send during the 20:45 press conference.
Investor Expectations and Diverging Views
Investors are wagering that the ECB will stop cutting rates in July. Some conservative policymakers have already urged a delay in further action, arguing that it would allow the ECB to reassess domestic and international uncertainties and gauge how policy fluctuations will affect the economic outlook. If the rate cut proceeds on Thursday, the deposit rate will drop to 2.0%, which the ECB considers a “neutral” level – neither restraining nor actively stimulating the economy.
Deutsche Bank analysts noted in a report, “To secure the hawkish faction’s support for a June rate cut, conditional and patient hints may be required. That is, as long as no significant negative surprises occur in the meantime, it could suggest a willingness to pause rate cuts in July and wait until September for the next move.”
The Divide: Rate Cuts vs. Pauses
During the previous seven interest rate cuts, the 26 – member ECB management committee faced little internal friction. But now, opinions are divided. Some policymakers hope this will be the last rate cut, fearing excessive government spending in Europe, while others advocate for more monetary support to sustain the region’s fragile economic growth.
The call to suspend rate cuts stems from the fact that the short – and medium – term outlooks for the 20 – nation eurozone vary significantly, suggesting that different policies may be needed to address these disparities.
In the short term, inflation may continue to decline and even fall below the ECB’s target. However, increased government spending and heightened trade barriers could fuel price pressures in the long run. Adding to the complexity is the 12 – to 18 – month lag in the impact of monetary policy on the economy, meaning that current support measures may end up affecting an economy that no longer requires such stimulus.
Economic Projections and External Pressures
The ECB is expected to acknowledge the recent economic slowdown and revise down its growth and inflation forecasts for next year.
President Trump’s trade war has already started to undermine economic activities. Given its impact on business confidence and investment, even if the US and Europe reach a trade settlement in the future, some lasting negative effects may be inevitable. This lack of growth, combined with falling energy costs and a strengthening euro, will dampen price pressures.
Investec economist Sandra Horsfield said, “The high level of uncertainty regarding tariffs makes it difficult for businesses to make long – term investment and recruitment decisions. In the short term, this uncertainty itself will act as a force suppressing inflation, regardless of the final tariff decisions.”
Most economists predict that inflation next year may fall below the ECB’s 2% target, reminiscent of the pre – pandemic period when price growth persistently remained below this level.
Uncertain Long – Term Outlook
Looking further ahead, the economic outlook becomes even more uncertain. The key factor is Trump’s tariff war and its potential ripple effects on prices in the Eurozone.
The ECB is formulating various plans to anticipate future developments, but there is a lack of confidence in any predicted outcomes. One policymaker believes that the probability of the baseline scenario coming to fruition is less than 50%.
The EU may retaliate against any permanent US tariffs, driving up international trade costs. At the same time, companies may restructure their operations to avoid trade barriers, but such changes in the value chain could also lead to cost increases. Additionally, higher European defense spending (especially in Germany) and the costs associated with the green transition may push up inflation. As the eurozone’s aging population causes the workforce to shrink, wage pressures are likely to remain high.
Divergent Stances Among Policymakers
Against this backdrop, hawkish ECB member Schnaabel warned against further easing measures, stating that the ECB “is well – positioned to assess the possible future evolution of the economy” and will act if necessary.
The governors of the Dutch and German central banks, Noort and Nigel respectively, also cautioned about the uncertain medium – term inflation outlook.
However, some management committee members are open to more aggressive actions. Belgian Central Bank Governor Wensch said the ECB might need to provide “modest” support to the economy to prevent inflation from falling below the target.
Complexity of Future Policy Communication
As the inflation rate nears the 2% target, investors expect the ECB to implement one more rate cut after this week, but are unsure of the timing. A Bloomberg survey shows that analysts are more decisive, predicting that the final interest rate will reach 1.75% in June and September.
Currently, the inflation trend in the Eurozone appears benign in the near term. Since the US first announced “counter – tariffs” in April, energy costs have declined significantly and the euro has strengthened. However, future price developments will depend on whether Europe retaliates against the US trade war. In the long term, European spending on defense and infrastructure, disrupted supply chains, and an aging workforce could intensify inflationary pressures.
Bloomberg’s senior Eurozone economist David Powell said, “The ECB is almost certain to cut rates by another 25 basis points at the next meeting. The anti – inflationary impact of US tariffs, the latest wage growth data, and our forecasts all suggest that the Eurozone no longer faces a real inflation problem. The ECB’s governing council is also likely to adopt a moderate tone and keep the door open for further monetary easing later this year.”
In contrast, Berenberg’s chief economist Holger Schmieding believes that rising prices will be the dominant trend in the future. “The main reason is the population structure and the structural labor shortage,” he said. “Currently, Trump’s policies have cast a shadow over many aspects. But monetary policy is already having an effect, and there is no need for significant additional stimulus at this time.”
UBS economist Reinhard Cluse said, “We believe the ECB’s window for rate cuts will close by the end of summer.” He added, “Given the structural strain in the eurozone’s (especially Germany’s) labor market due to the demographic shift in 2027, the ECB may have to raise interest rates again at the end of 2026 to address rising inflationary pressure.”
Limited Guidance Expected
Investors may not receive clear guidance from ECB President Lagarde on Thursday. The bank has recently been more focused on highlighting the factors influencing its decisions rather than hinting at future actions.
Sonja Marten, head of monetary and policy research at DZ Bank, said, “The path ahead is highly uncertain. The ECB will be extremely cautious and refrain from making any commitments before the next press conference.” She forecasts two more rate cuts this year but sees little reason for immediate stimulus as economic growth is expected to rebound by 2026.
AXA Group’s chief economist Gilles Moec said, “From now on, each rate cut will become more difficult and face greater resistance. Ultimately, it will be the economic data that convinces the management committee to take action, which I believe they will eventually have to do. This will make policy communication after the summer more challenging.”
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