European Central Bank set to trim interest rates for fifth time since June

The European Central Bank is widely expected to announce yet another interest rate cut on Thursday, in what would be the fifth reduction since the central bank began easing monetary policy in June last year.

Markets were last pricing in an over 90% chance of a 25-basis-point cut on Thursday, which would bring the ECB’s deposit facility, its key rate, to 2.75%. Further rate cuts are then being priced in as the year continues, which would bring the deposit facility to 2% by the end of 2025, if they materialize.

The ECB is grappling with balancing a re-acceleration of euro area inflation in recent months with sluggish economic growth in the region. Headline euro are inflation rose for the third consecutive month to 2.4% in December, after falling below the ECB’s 2% target several months earlier. A renewed pick-up in inflation was expected, as base effects from lower energy prices fade.

A first reading of the euro area’s gross domestic product for the fourth quarter of 2024 is due out on Thursday, with economists polled by Reuters anticipating 0.1% growth from the previous period.

Markets will be closely following ECB President Christine Lagarde’s post-announcement press conference amid uncertainty surrounding newly inaugurated U.S. President Donald Trump’s policies.

Investors are keen to gauge how comfortable the ECB is with diverging from the U.S. Federal Reserve in terms of monetary policy and prospective relaxation. The Fed on Wednesday left interest rates unchanged, in line with expectations. Markets are overall pricing in fewer interest rate cuts from the Fed than from the ECB this year.