ECB To Cut Rates Again As Trade Wars, Defense Cloud The Outlook

The European Central Bank (ECB) is set to cut interest rates again this week, in what is expected to be its last easy decision for a while, as trade wars and defense spending drive the most significant shift in Europe's economic policy in decades, Balazs Koranyi and Francesco Canepa reported for Reuters.

Investors will be closely watching for signals about the ECB’s future policy moves.:

With economic conditions evolving faster than models can predict, and policymakers increasingly divided over the need for further support, investors will closely watch for signals about the ECB’s future policy moves.

After aggressively cutting borrowing costs over the past nine months—as inflation receded and economic growth weakened—the eurozone’s central bank has already signaled another 25-basis point reduction in the deposit rate on Thursday, bringing it down to 2.5%.

The outlook beyond this cut is more uncertain. Interest rates are slowly reaching a level that no longer restrains economic growth, which would normally indicate an end to the easing cycle.

However, these are not normal times.

A trade war with the U.S. is looming, and European firms are delaying investments, fearing that prolonged economic conflict will dampen demand.

Meanwhile, Germany and the European Commission have announced transformational changes in fiscal policy to boost defense and infrastructure spending, partly to offset declining U.S. support—a tectonic shift that could reshape growth dynamics for years to come.