San Francisco Frontiers - ECB to cut rates again as debate heats up on pause

It will mark the central bank's sixth reduction since June last year, with its focus having shifted from tackling inflation to relieving pressure on the 20 nations that use the euro.

With "growth stuttering", a quarter-point cut at Thursday's meeting "is a near certainty", HSBC bank analysts said.

A reduction by a quarter percentage point would bring the bank's benchmark deposit rate to 2.50 percent.

The rate reached a record of four percent in late 2023 after the ECB launched an unprecedented hiking cycle to tame energy and food costs that surged after Russia's invasion of Ukraine.

But investors will be keeping an eye out for signals from ECB President Christine Lagarde that a pause might be on the horizon, after some officials said it was time to start discussing the matter.

Markets have indicated they expect the ECB to bring the deposit rate steadily down to two percent by the end of the year to support a eurozone economy that has showed increasing signs of weakness.

- Rate debate -

Some policymakers are starting to ask how the central bank should continue on the path downward.

Isabel Schnabel, an influential member of the ECB's board, told The Financial Times last month that policymakers were getting "closer to the point where we may have to pause or halt our rate cuts".

"We can no longer say with confidence that our monetary policy is still restrictive," she said.

Meanwhile Pierre Wunsch, a member of the ECB's rate-setting governing council and Belgium's central bank chief, also warned against "sleepwalking" into making too many reductions.

Uncertainty about the potential impact of US President Donald Trump's policies is also clouding the outlook.

Some are fearful that eurozone growth could be hit if he goes ahead with levying tariffs on EU goods, while others worry that a broad, disruptive trade war could reignite inflation.

Eurozone inflation has already ticked up in recent months, hitting 2.5 percent in January, though ECB officials have voiced confidence it will settle around the central bank's two-percent target later this year.

In the United States, where the economy is in more robust health than in the eurozone, the Federal Reserve paused rate cuts recently after inflation rose and amid uncertainty about the future direction of Trump's policy.

But ING bank analyst Carsten Brzeski pointed out that, while some ECB members were starting to push back against too much easing, there remained others with a "dovish" bias who were "still calling for continued rate cuts".

And most observers do not expect Lagarde, who says the central bank will continue to make decisions "meeting-by-meeting", to give any clear signals about a potential pause.

- Poor outlook -

The ECB will also publish updated economic forecasts on Thursday.

While inflation predictions are expected to remain stable, the central bank might further lower its growth projections for the coming years, according to economists.

The eurozone has eked out meagre growth in the past two years amid a poor performance in its biggest economies, Germany and France, leaving the single currency area lagging behind the United States and China.

While France still faces political instability, there are hopes the recent German election could lead to the formation of a more stable governing coalition that could enact economic reforms.

Despite the debate on a potential pause in rate cuts, Brzeski said the poor outlook might leave the ECB with little choice but to further ease borrowing costs.

"There is still a high risk that the eurozone economy underperforms over the coming months," he said.

This "will force the ECB to bring rates down to at least two percent -- whether they like it or not."

P.Thomas--SFF