ECB Faces Pressure as German Spending Plans and US Trade Policy Stir Uncertainty
The European Central Bank (ECB) is set to announce another interest rate cut on Thursday, but growing concerns over German spending and US trade policies have analysts questioning how long the cuts will continue.
This would mark the sixth consecutive reduction since June last year, as the ECB shifts its focus from inflation control to stimulating the struggling eurozone economy. A quarter-point cut is expected, bringing the deposit rate down to 2.5%.
Rethinking the Next Move
After aggressively raising rates to a record 4% in 2023 to curb rising food and energy costs triggered by Russia’s invasion of Ukraine, the ECB has been steadily easing borrowing costs. However, speculation is mounting that the bank may hit pause soon.
Investors are closely watching ECB President Christine Lagarde for any signs of a shift. Some officials have already hinted that discussions about slowing or halting cuts should begin.
Adding to the uncertainty are potential US tariffs—President Donald Trump has floated a 25% duty on all EU goods, raising concerns about the impact on trade and economic stability.
Meanwhile, Germany’s likely next chancellor, Friedrich Merz, has announced plans to significantly boost defense and infrastructure spending. Analysts say this unexpected move could complicate the ECB’s decision-making.
Economic Ripples from Germany
Merz’s spending plan, unveiled on Tuesday, aims to strengthen Germany’s military and infrastructure amid fears that the US might scale back its security commitments to Europe.
While increased investment could support eurozone growth, it also has the potential to push inflation higher—something that could discourage further rate cuts.
Following the announcement, expectations for an ECB rate cut in April have already started to fade. Kathleen Brooks, research director at XTB, noted that if policymakers believe German spending will drive inflation, “expectations for more ECB cuts will likely be scaled back.”
Balancing Growth and Inflation
Even before the German announcement, ECB officials were debating how much further they should go with rate reductions. Isabel Schnabel, a key figure on the bank’s board, recently told The Financial Times that the ECB is approaching a point where it may need to reassess its strategy.
“We can no longer say with confidence that our monetary policy is still restrictive,” Schnabel stated.
While inflation in the eurozone dipped slightly to 2.4% in February, it remains above the ECB’s target of 2%. Despite this, officials believe inflation will stabilize by the end of the year.
In contrast, the US economy has shown greater resilience, prompting the Federal Reserve to pause rate cuts following a rise in inflation and ongoing uncertainty over Trump’s economic policies.
Lagarde’s Next Move
Lagarde has remained cautious, sticking to her “meeting-by-meeting” approach. Analysts expect her to continue this strategy, avoiding firm commitments in her post-meeting remarks.
“Global uncertainties have increased significantly in recent weeks,” noted economist Felix Schmidt from Berenberg Bank, citing Trump’s tariff threats.
Given these factors, Lagarde is unlikely to offer clear guidance, preferring to keep the ECB’s options open.
The bank is also set to release updated economic forecasts, which are expected to maintain stable inflation projections but could downgrade growth expectations for the eurozone.
For now, the region continues to lag behind economic powerhouses like the US and China, with sluggish growth in Germany and France weighing heavily on its outlook.
