ECB interest rate decision preview: what to expect

What to expect from the ECB meeting

​The European Central Bank's (ECB) nGoverning Council meets on Thursday for its crucial monetary policy decision. Markets widely expect a 25 basis point cut across all key rates.

This would bring the deposit rate down to 2.75% from 3%, the main refinancing rate to 2.90% from 3.15%, and the marginal lending rate to 3.15% from 3.40%. This move would mark the ECB's fifth consecutive rate cut, reflecting ongoing efforts to stimulate the eurozone economy amid persistent low inflation and subdued growth.

ECB officials comments, low growth and falling inflationary pressures

Recent comments from ECB officials, including Villeroy who talked about the “plausible consensus that we will go on acting at each meeting which we have successfully practised since September” and Kazimir that 3-4 “cuts in a row are feasible” but that this week “for [him] personally, the deal is done” and Nagel that there is a certain probability the central bank will cut rates this week, confirm the overall dovish stance.

This comes as no surprise as eurozone preliminary manufacturing purchasing managers index (PMI) last week, even though better than expected, still contracted amid falling inflation. Recent economic indicators showing a decline in inflation rates across major eurozone economies, with the overall rate nearing the ECB's 2% target, strengthen the case for monetary easing.

​Eurozone one-year inflation graph

However, core inflation remains elevated, particularly in the services sector, suggesting underlying price pressures persist. Concurrently, the eurozone economy exhibits signs of weakening, with business surveys indicating reduced output and subdued confidence.

Europe’s economic powerhouse Germany experiencing a recession with its gross domestic product (GDP) contracting by 0.2% in 2024, following a 0.3% decline in 2023, also concerns ECB policymakers. This marks the first time in over two decades that Germany has faced consecutive annual economic contractions.

Nonetheless, ECB President Christine Lagarde has emphasised a data-dependent approach to monetary policy, indicating that the pace and scale of future rate adjustments will be guided by incoming economic data.

Policymakers are balancing the need to support economic activity with caution against potential inflationary risks. The upcoming decision will be closely scrutinised for insights into the ECB's assessment of the economic outlook and its policy trajectory for the remainder of the year.

Potential market impact

Rate cuts typically boost stock markets as lower borrowing costs can stimulate economic growth and corporate earnings. European indices may benefit if the ECB confirms a dovish stance beyond this week’s rate cut as this is probably already priced into the stock market.

Bond prices often rise when interest rates fall, making existing higher-yield bonds more attractive to investors. Lower bond yields usually lead to a rise in stock indices as lower borrowing costs stimulate growth. The EUR/USD has already dropped to $1.0178 in mid-January, its lowest since November 2022, as traders price in rate cuts.

Any signs of disagreement within the ECB Governing Council could lead to more neutral communication, potentially pushing EUR/USD back towards the $1.0700 region, especially now that EUR/USD is grappling with key technical resistance.

​Euro 10-year government bond yield daily chart

​EUR/USD daily chart

Trading considerations

Traders should prepare for potential volatility around the announcement and subsequent press conference. Key support for EUR/USD lies at $1.0178, the mid-January low. Risk management is crucial during central bank meetings. Consider using trading alerts to monitor market movements.

While macroeconomic data supports a dovish ECB stance, the Governing Council may avoid explicitly committing to future rate cuts following Thursday’s widely anticipated rate cut. Watch for any deviation from market expectations, as this could trigger significant price movements across European assets.