LONDON, Jan 27 (Reuters) - The European Central Bank will convene on Thursday for the first time since Donald Trump was re-elected, with U.S. tariff threats looming over the euro zone's slowing economy, potentially complicating the economic forecast.
Traders anticipate further rate cuts as inevitable, posing the question of whether the ECB will provide new insights on future actions.
According to Bruno Cavalier, Chief Economist at Oddo, market expectation is that President Christine Lagarde will signal openness to additional rate reductions.
Here are five crucial questions for the markets:
1. What actions will the ECB take on Thursday?
It is highly probable that the ECB will reduce the key deposit rate by another 25 basis points to 2.75%.
Market expectations align with this move, especially after the ECB removed restrictive rate guidance from its December communications.
Frederik Ducrozet, Head of Macroeconomic Research at Pictet Wealth Management, mentioned that the outlook has not shifted since December.
2. How does Trump's return influence the ECB's perspective on tariff risks?
As of now, economists believe there is no immediate impact.
While President Trump has not enforced tariffs and indicated hesitance towards universal tariffs, his stance on trade could potentially affect the euro zone.
The focus for the ECB remains on how tariffs might affect euro zone inflation and demand.
3. How significant is the need for rate cuts by the ECB?
Traders foresee around four rate cuts from the ECB this year, with some policymakers suggesting rates could fall to 2%.
This aligns rates with the neutral rate, balancing growth needs.
However, some cautious hawks, like Isabel Schnabel, warn about the pace of rate cuts.
4. How concerning is the rise in inflation for the ECB?
Economists aren't overly worried about inflation's increase to 2.4% in December, as it aligns with the ECB's expectations.
Chief Economist Philip Lane believes inflation will subside soon and has cautioned against keeping rates too high for prolonged periods.
The ECB primarily emphasizes inflation, but Danske Bank analyst Piet Christiansen notes the intricate link between growth and inflation.
5. What if the Fed halts rate cuts?
The ECB's rate adjustment may slow depending on the Fed's decision.
If the Fed pauses rate cuts due to a robust U.S. economy, Europe may benefit, potentially leading to fewer ECB cuts.
Conversely, if the Fed halts due to economic stagnation, the impact on the ECB might differ.
Pictet's Ducrozet highlights that a euro depreciation to parity may not be a significant concern for the ECB.