This week's interest rate cut is almost certain! Eurozone economy weak, European Central Bank rates may be cut repeatedly

According to Zhitong Finance, the Eurozone's economic performance, which is below the global average, is persuading the European Central Bank (ECB) that it can further loosen its constraints on economic growth by cutting interest rates for the fourth consecutive time this week. Surveys indicate that data to be released this Thursday may show that Germany, the Eurozone's largest economy, grew only 0.1% in GDP in the fourth quarter, down from 0.4% in the third quarter. Subsequently, the ECB will announce its interest rate decision.

The business survey released by S&P Global last week has raised some hopes that a slight recovery may be feasible. However, officials are increasingly convinced that inflation rates will return to 2%, and they will not be intimidated—especially in the face of uncertainty, particularly if Trump is re-elected as President of the United States, casting a shadow over businesses and households.

Jari Stehn, Chief European Economist at Goldman Sachs, stated: "The risks currently facing the Eurozone economy are on the growth side, not the inflation side. The ECB can and should further cut interest rates to support economic activity."

Delving into the 20 member countries of the EU, Germany and France are largely to blame for the weakness, as both countries are experiencing political turmoil. Preliminary data released by Germany this month estimates a contraction of 0.1% in the fourth quarter. France may stagnate. For other member countries, Italy may grow by 0.2%, while Spain, which has performed well in the region, may grow by 0.6% after a growth rate of 0.8% in the third quarter.

Members of the ECB's Governing Council have previously spoken in places like Davos, confirming market bets that the ECB will cut the deposit rate from the current level of 3% at least twice in a row this week and in March. Analysts surveyed by institutions also share this outlook.

One reason for the expectation of monetary easing is that borrowing costs at current levels continue to suppress economic activity. In the context of low confidence and further expected inflation slowdown, this approach seems no longer necessary. Michala Marcussen, Chief Economist at Société Générale, stated: "The growth outlook for 2025 is bleak but still in positive territory—what people are worried about is competitiveness. Given the current economic situation, a 25 basis point cut at each meeting seems appropriate."

If there are two more rate cuts, the ECB's deposit rate will drop to 2.5%, slightly above the neutral range mentioned by ECB President Lagarde. For officials, the neutral rate—which neither restricts nor stimulates growth—is an important milestone as they will decide how much further to lower interest rates The challenge lies in the difficulty of observing the threshold in real-time. Most economists expect interest rates to be between 2% and 2.25%, which means the European Central Bank will further cut rates after March. The median forecast is for rates to stabilize at 2%, although there is significant variation in predictions for the end of the year.

This largely depends on the evolving economic agenda of Trump and whether he will fulfill his promise to impose tariffs on European goods. European Central Bank officials have recently emphasized that any negative impact will be more evident in terms of output than prices, highlighting the view that the U.S. president will not disrupt the eurozone's rate-cutting cycle.

Slovak Central Bank Governor Peter Kazimir stated last week, "I am more concerned about the potential negative impact on European economic growth than the potential inflation impact."

However, Morgan Stanley economist Jens Eisenschmidt said the consequences largely depend on the measures ultimately implemented. He stated, "According to our baseline, only very limited additional tariffs, not far from those implemented in 2018, would have a small impact and be concentrated in 2026. If we raise tariffs to levels closer to those implied during the campaign, such as a universal tariff of 10% on all goods imported from Europe, the impact would be much greater."

Another issue is service sector inflation, which remains around 4% despite the overall economic slowdown, although easing wage pressures mean that businesses will raise prices at a slower pace in the coming months. The beginning of the year is crucial in this regard, as it is when many prices are typically readjusted. However, S&P Global's PMI indicates that officials must remain vigilant as price pressures continue to mount.

Bert Colijn, an economist at ING, stated, "Businesses report that they are passing on rising costs to consumers. Although the biggest inflation risks have diminished, this indicates that the upside risks to inflation have not yet become a thing of the past."