All eyes on upcoming ECB rate cut decision

By Burhan Sansarlioglu and Emir Yildirim

ISTANBUL (AA) — The European Central Bank (ECB) is expected to cut interest rates on Thursday amid tariff concerns, slowing inflation, and weakening eurozone manufacturing activity, analysts told Anadolu.

The pandemic caused inflation in the region to rise to 10.6% in October 2022 before falling to 1.9% in May of this year. To combat inflation during COVID-19, the ECB raised the interest rate, increasing it to 4.5% in September 2023.

The bank maintained its rate for a while before beginning a rate-cutting cycle in April last year, gradually lowering the policy rate to 2.4% by April 2025.

Rising geopolitical risks, high interest rates, and trade wars all have an impact on regional economic activity.

The ECB's deposit facility rate is currently at 2.25%, the main refinancing operations rate at 2.4%, and the marginal lending facility rate at 2.65%. The latest inflation data fell short of the ECB's 2% target, and combined with growth concerns caused by tariffs, the bank is expected to cut interest rates by 25 basis points.

Peter Vanden Houte, chief economist at ING Group, told Anadolu that stagflation remains a concern, and tariffs between the EU and the US have had an impact on the region.

“Weaker activity and declining inflation would plead for a new rate cut; that said, some hawkish members of the Governing Council have been advocating a wait-and-see approach,” he said, adding that the ECB is likely to cut its deposit rate by 25 basis points to 2%.

Hadrien Camatte, senior economist at Natixis, said there will be “no pause for cutting rates,” expecting a 25-basis-point cut in the bank’s next meeting, as well as another cut of 25 basis points after June, lowering its rate to 1.5%.

“We are confident that the ECB will implement another rate cut in either July or September, as several governors have expressed their readiness to adopt a mildly accommodative stance,” he said. “We expect slight downward revisions in inflation forecasts for 2025 and 2026 due to falling oil prices and euro appreciation; additionally, we forecast a decline in services inflation in the coming months.”

Bas Van Geffen, senior macro strategist at Rabobank, said the ECB will cut its deposit rate to 2% due to high uncertainties, keeping all options open for the bank. “We don’t expect clear guidance from Lagarde’s press conference,” he added.