The European Central Bank is expected to remain steady tonight, and the current rate-cutting cycle may have ended

According to the Zhitong Finance APP, the European Central Bank will announce its latest interest rate decision at 20:15 Beijing time on Thursday. Based on a survey of 59 economists, the European Central Bank is expected to keep the deposit facility rate unchanged at 2%, judging that the Eurozone economy can withstand the tariffs imposed by U.S. President Trump and the renewed political turmoil in France. Additionally, the market believes that the current cycle of interest rate cuts by the European Central Bank has ended, and the new quarterly forecast will alleviate concerns about inflation remaining below 2% in the long term.

Given that current Eurozone inflation is considered close to the European Central Bank's target level, and the Eurozone economy has shown resilience in the early stages of U.S. trade tariffs, most European Central Bank officials are satisfied with the current monetary policy stance.

However, European Central Bank officials must also assess the impending policy shift by the Federal Reserve. The Federal Reserve is expected to cut interest rates next week, and if it signals more cuts in the future, it could reignite the upward momentum of the euro.

Moreover, the French government collapsed on Monday. However, unless there is a market crash, European Central Bank President Christine Lagarde is unlikely to mention the situation in France extensively at the press conference following the interest rate decision.

Interest Rates

After the deposit facility rate was lowered from 4% to 2%, European Central Bank Executive Board member Isabel Schnabel strongly opposed further rate cuts. She stated that due to factors such as trade tariffs and increased fiscal spending, Eurozone inflation may exceed expectations in the coming years.

Other officials also showed a lack of interest in further action. The Governor of the Bank of Estonia, Madis Muller, stated last week that it is reasonable to "take time to observe economic data" now. The Governor of the Bank of Finland, Olli Rehn, mentioned that there is currently "room to think about the next steps."

Senior Eurozone economist David Powell stated, "The European Central Bank is not in a hurry to cut rates again. Policymakers are waiting for clearer signals to assess how the economy responds to trade headwinds, while core inflation has not declined as they had hoped. The latest U.S.-Europe trade agreement has brought little relief, and the effects of tariffs may become more pronounced in the coming months."

This cautious attitude is also reflected in market expectations. The market believes that the likelihood of the European Central Bank cutting rates again this year is less than one-third.

Of course, there are differing opinions. The Governor of the Bank of Lithuania, Gediminas Simkus, hinted at a possible rate cut in December, citing a strong euro, geopolitical uncertainty, or a shift of cheap Asian goods to Europe that could depress prices.

In contrast, the acting Governor of Slovenia, Primoz Dolenc, did not rule out the possibility of a rate hike next. A minority of forecasters in the aforementioned survey believe that such a scenario could occur in the second half of 2026 Economy

The European Central Bank's new economic forecast may indicate a gradual recovery in economic growth, with medium-term inflation expected to reach target levels. Among a few possible adjustments, the inflation forecast for 2026 may be revised to close to 2% to alleviate concerns about inflation remaining below target for an extended period.

Data since the July meeting suggests that, despite facing higher tariffs and the negative impacts of the Russia-Ukraine conflict, the European economy remains robust. Business activity continued to expand in August, with German business confidence rising to its highest level since 2022.

However, further examination of this data also reveals signs of weakness. Bloomberg Economics points out that after businesses accelerated actions earlier this year to beat Trump tariffs, investment and private consumption remained sluggish in the second quarter. Meanwhile, the inflation rate in August was 2.1%, slightly higher than in July; core inflation has remained at 2.3% for the fourth consecutive month. Although wage growth has slightly slowed, it remains above levels generally considered consistent with price stability.

France

As the second-largest economy in the Eurozone, France's public finances remain a significant source of uncertainty.

Due to the failure to reach an agreement on budget cuts, Francois Bayrou resigned as Prime Minister of France this week. His successor, Sebastien Lecornu—the fifth Prime Minister in two years—must seek support in a divided parliament to manage the largest deficit in the Eurozone.

This instability has led to France's borrowing costs being higher than those of lower-rated Italy. The market will closely interpret Lagarde's statements regarding the situation in France to look for signs of her willingness to utilize the European Central Bank's crisis tools, although she is likely to remain cautious