The European Central Bank (ECB) is expected to cut interest rates by another 25 basis points to 2.75 per cent on Thursday in a bid to energise the continent’s flagging economy.
As inflation trends towards 2 per cent, ECB policymakers have switched their attention to the bloc’s underperforming economy.
A potential fly in the ointment is the possibility of US tariffs that US president Donald Trump has pledged to impose on all US imports, a move that could prove very problematic for big exporters such as Germany, which is already in recession.
The ECB is expected to drop its main lending rate from 3 per cent to 2.75 per cent, its fifth cut since last July.
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The move will be good news for the estimated 127,000 Irish-based tracker mortgage holders, who will see an immediate reduction in their monthly repayments. Those on fixed-rate or variable-rate mortgages will have to wait to see if their banks pass on the cut.
Markets have factored in an additional 25 basis point cut at the ECB’s subsequent meeting in March, with subsequent policy moves dependent on economic data, potentially reaching a terminal level of 2 per cent.
ECB policymakers speaking at the World Economic Forum in Davos said the inflation trajectory in Europe may be diverging from the US, with European inflation concerns appearing less severe.
“We see another 25-basis point interest rate cut from the ECB this week as practically a forgone conclusion,” said Matthew Ryan, head of market strategy at global financial services firm Ebury.
“The governing council has made clear that its priority for now is supporting activity in the common bloc, and recent data has remained consistent with an economy that is deep in the mire of stagnation,” he said.
“We suspect that [ECB president Christine] Lagarde will strike a dovish note on the growth outlook, despite the tentative signs of a rebound in recent PMI figures, and she may flag heightened uncertainty surrounding Trump’s trade restrictions,” he said.
“The ECB is unlikely to provide much in the way of forward guidance, other than to hint that additional cuts will likely be required. Any remarks that attempt to guide the market towards a terminal level of interest rates will be very closely watched,” Mr Ryan said.
“Financial markets are currently pricing in a terminal ECB rate of around 2 per cent, so any indication of a more aggressive cutting cycle could lead to some weakness in the euro this week,” he said.
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