European Central Bank Interest Rate Decision Outlook: Is Tonight the Last Cut? Trade Wars and Military Restructuring May Bring the Easing Cycle to a Sudden Halt

According to the Zhitong Finance APP, at 21:15 Beijing time, the European Central Bank will announce its interest rate decision. The market generally expects the central bank to cut interest rates again, which may be the last easy decision made by the bank for some time, as the trade war and rearmament have triggered the largest economic policy turmoil in Europe in decades.

As the pace of change in the economic outlook exceeds what economic models can bear, and the divergence among policymakers regarding the need for more support grows, attention will focus on the signals the European Central Bank sends regarding future actions.

Over the past nine months, as inflation has eased and economic growth has slowed, the Eurozone central bank has rapidly cut borrowing costs. The market expects the central bank to announce a 25 basis point cut in the deposit rate to 2.5% on Thursday.

In addition, the outlook is more complex. Interest rates are gradually approaching levels that no longer suppress economic growth, which typically signals the end of a loosening cycle. However, these are not normal times. With a trade war with the United States on the brink, economic growth has been affected as businesses worry that a prolonged conflict will harm demand, thereby suppressing investment.

Meanwhile, both Germany and the European Commission have announced reforms to fiscal rules to increase defense and infrastructure spending, partly to replace support from the United States—this significant shift could impact economic growth for years to come.

Analysts at Bank of America stated in a report: "This is the last 'easy' rate cut made amid increasing divergence. We believe the guidance will not change... but we expect the divergence among council members to intensify."

Will the European Central Bank's "Restrictive Order" Be Eased?

The European Central Bank will strive to keep up with the rapidly changing outlook. Based on data collected weeks ago, its new economic forecasts may show a slowdown in economic growth and a slight rise in the inflation trajectory. However, policymakers will be more pragmatic, recognizing that the world has changed since the forecast cutoff date, and they now face significant uncertainty.

Davide Oneglia of TS Lombard stated: "Due to the re-rating of economic growth, the European Central Bank will face pressure to slow down its easing policy, although cooling wages and employment, the lagging effects of fiscal policy, and the escalating tariff threats from the U.S. to the EU keep the deposit rate below 2% as a baseline."

A key point to watch on Thursday is whether the European Central Bank will maintain its wording of "keeping policy restrictive" or abandon this phrasing, which would indicate that policymakers believe they are close to achieving their goals. However, even removing that phrase does not necessarily mean a pause—instead, it may signal greater uncertainty and intense debate in the weeks leading up to the next policy meeting.

The European Central Bank's forecasts already incorporate market bets on rate cuts, so if inflation remains at 2% by the end of this year, then two more rate cuts will still be the central bank's baseline forecast. The European Central Bank's models also show that there is room for further easing, with deposit rates in the range of 1.75% to 2.25% no longer restricting growth.

Another issue to watch is whether European Central Bank President Christine Lagarde will maintain her view that the policy direction is clear, with only the timing and magnitude of easing up for discussion Currently, investors believe that the European Central Bank will continue to maintain this policy. Following the interest rate cut by the German central bank on Thursday, the market expects the European Central Bank to cut rates two more times this year, with the cut slightly lower than the rate cut before the German budget announcement on Tuesday, but still within the expected range of the past few weeks.

The European Central Bank will announce its policy decision at 21:15 Beijing time, followed by a press conference by Lagarde at 21:45 Beijing time