The European Central Bank's interest rate decision this week focuses on five key issues under the shadow of Trump 2.0

With Trump's return to the White House, the European Central Bank (ECB) will hold its first policy meeting of the year this Thursday, and traders expect that further interest rate cuts by the ECB are "a done deal." Analysts believe that the current focus is on the potential complex outlook for the Eurozone, which is already facing a weak economy under the shadow of U.S. tariff threats.

In this context, analysts point out that the ECB is facing five key questions:

What action will the ECB take on Thursday?

Analysts believe that the market generally expects the ECB to cut rates by another 25 basis points this Thursday, bringing the key rate down to 2.75%, and this expectation has already been fully priced in.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, stated that the economic outlook has not changed since last December.

How does Trump's return affect the ECB's view on tariff risks?

So far, economists believe the impact is limited.

Analysts argue that although Trump has not immediately implemented tariffs, he has targeted Canada and Mexico and has complained about trade conditions with the EU. For the ECB, the key issue is how tariffs will affect inflation in the Eurozone. ECB President Christine Lagarde stated last week that the bank is not "overly concerned" that Trump's policies will export inflation to Europe.

Economists at Dutch Bank indicated that the ECB will view tariffs as primarily having a negative impact on growth.

To what extent does the ECB need to cut rates?

Traders expect the ECB to cut rates nearly four times this year, with some policymakers explicitly agreeing that rates will be lowered to around 2%.

However, some hawkish figures are cautious about the pace of rate cuts. PIMCO portfolio manager Konstantin Veit believes that once rates reach 2.5%, the ECB will need to think more deeply about its next steps. However, he added that given the weak economy, there is a significant risk of rates dropping to 1.75%.

Lagarde stated last week that the neutral level is between 1.75% and 2.25%.

How much impact does rising inflation have on the ECB?

Economists believe this is not too concerning. Although the inflation rate rose to 2.4% in December, driven by rising energy prices and service costs, reaching a new high since July, and the service sector inflation rate has remained around 4%, the rise in inflation is consistent with the ECB's expectations.

Chief Economist Philip Lane stated that he believes wage growth is slowing, which will quickly pull down service sector inflation. He also warned that maintaining excessively high rates for a long time could push inflation below target.

How will the ECB respond if the Federal Reserve stops cutting rates?

Analysts believe that the ECB may slow the pace of rate cuts, but this depends on the reasons behind the Federal Reserve's decision to stop cutting rates.

Ducrozet from Pictet pointed out that if the U.S. does not cut rates because of a strong economy, it would also be good news for Europe, and the ECB may reduce the extent of rate cuts. However, if it is due to a stagflation scenario, the impact on the ECB may not be significant.