ECB decision preview

The European Central Bank (ECB) is widely expected to lower interest rates by 25 basis points on January 30, marking the beginning of a potential easing cycle. While this move enjoys broad support within the Governing Council, future rate decisions may become more contentious as the ECB approaches what it considers a “neutral” policy rate.

Inflation trends support a rate cut

Inflation is projected to fall below the ECB’s 2% target in the first quarter of 2025, primarily due to lower energy prices and a slowdown in service-sector inflation. With inflationary pressures easing, policymakers see room for monetary easing to support economic growth.

The overall risk assessment remains largely unchanged from the previous meeting. While inflation risks appear balanced, economic growth risks continue to tilt downward. Recent GDP figures for the fourth quarter of 2024 reinforce concerns about weak economic momentum.

Ongoing consensus on policy direction

Despite some divergence in views on the long-term path of interest rates, policymakers remain aligned on the need for immediate action. ECB Executive Board member Isabel Schnabel recently indicated that there are no major threats preventing the bank from reaching its inflation target, suggesting further rate cuts could be on the horizon.

The ECB’s internal sentiment indicators, which track policymakers’ public statements, also point to a strong consensus for a dovish approach.

The neutral rate debate

A key discussion within the ECB concerns the level of the neutral nominal interest rate—the point at which monetary policy neither stimulates nor restrains economic growth. Most ECB officials estimate this rate to be around 2%, though some argue it could be higher.

This debate is expected to intensify as interest rates approach this level. ECB President Christine Lagarde has hinted that discussions on the neutral rate will play a larger role in policy meetings throughout the year.

Projected rate path for 2025

Some analysts anticipate that the ECB will implement a total of 100 basis points in rate cuts this year. The easing cycle is expected to begin with back-to-back cuts in January and March, reducing the deposit rate to 2.5%. Thereafter, the pace of reductions may slow, with subsequent adjustments likely in June and September.

However, if service-sector inflation remains stubborn, the ECB could pause at 2.5%, halting further easing. Policymakers will be closely monitoring incoming inflation data before committing to additional moves.

Outlook: more deliberation ahead

While the upcoming rate cut appears certain, future decisions could become more contested as policymakers weigh inflation trends against economic growth concerns. The evolving discussion on the neutral rate will shape the ECB’s long-term strategy, influencing the pace and scale of rate reductions throughout 2025.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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