Felix Feather, Economist, at abrdn comments ahead of the ECB’s rate decision tomorrow as follows:
“With inflation slowing and growth weak, we expect the ECB will move to support the economy by delivering another 0.25% cut to its deposit rate on Thursday.
More broadly, we expect the ECB to reduce rates to at least the neutral level – the level at which monetary policy neither stimulates nor restrains the economy – over the summer, with the possibility of further cuts if economic conditions warrant it. We estimate this important but difficult to estimate variable to be around 2%.
However, should significant downside risks such as a trade-induced shock to GDP be realised, the ECB may need to take rates below neutral into outright accommodative territory.
Another key theme driving markets is the growing expectation for greater deficit spending on defence. Lagarde is unlikely to be drawn into speculation, especially with the European leaders gathering to discuss the future of defence spend financing on the same day. But the macroeconomic economic implications of a large boost to defence spending could be significant, and something the ECB might not be able ignore over the medium term.”
