ECB Expected to Cut Rates Amidst Inflation and Growth Concerns

The European Central Bank (ECB) will announce a 0.25 percentage point cut in the interest rate, lowering the rate on its deposit facility to 2.50%. This move is widely anticipated but is open to contention among policymakers about the future direction of rate cuts, with some contending that there may be a pause due to concerns that policy can no longer be described as clearly restrictive.

The action is amid a sufficiently decelerating rate of inflation, even though core inflation remains a problem, and the ECB wishes to maintain a medium-term inflation target of 2%. Economic growth in the eurozone is weak, with downside risks, further to support the case for monetary loosening.

Markets anticipate further rate cuts, even to 2% by end-2025, and are looking closely at the ECB forward guidance and new economic projections. The neutral rate is in debate, with ECB President Christine Lagarde placing it in the range of 1.75% to 2.25%