The market generally expects the ECB to cut interest rates for the third time this year as global tariff tensions and uncertainties threaten the economic growth of the euro zone.

As of Wednesday, according to data from the London Stock Exchange Group (LSEG),The latest market pricing reflects the probability of the ECB cutting interest rates by 25 basis points at about 94%, while the probability of a greater rate cut (50 basis points) is close to 6%.A 25 basis point cut would reduce the ECB’s deposit facility rate (its key interest rate) to 2.25%, down from its 4% high in mid-2023.

This series of relatively rapid rate cuts occur,The inflation rate in the euro zone has been below 3%, and is close to the ECB's 2% target recently. at the same time,Economic growth in the region has been weak。

When the central bank cut interest rates last time in March this year, it adjusted its wording on monetary policy, saying itIt is becoming apparently less restrictive”. In January this year, the ECB still described monetary policy as “restrictive.”

This shift in wording has been interpreted by some economists as a signal that policymakers have become more cautious in further reducing interest rates, raising questions about whether the monetary easing cycle may be paused. butRoller coaster trends in global trade and tariffs have changed that view to some extent in the past few weeks。

Tariff-induced growth concerns

Carsten Brzeski, global macro head of Dutch International, said in a report on Monday: "After the March meeting, the ECB appears to be ready to pause (rate cuts) at the next meeting. Given that interest rates are at the upper limit of the neutral rate estimate range, a little breathing seems appropriate. Especially the 'Europhoria' that emerged after the big turn in Germany's fiscal policy and Europe's apparent intention to increase security and defense spending has significantly improved the growth prospects in the eurozone. However,The suspension is no longer an option since the 'liberation day' of Trump's tariffs。”

He said global tariffs have rekindled concerns about the growth of the euro zone. Therefore, Brzeski evaluated,ECB is forced to cut interest rates。”

Investec economist Ryan Djajasaputra pointed out in a report that although many of the U.S. announced tariff plans have been temporarily shelved or cut. But the prospects for trade, tariffs and potential macroeconomic impacts remain unclear.

"The uncertainty remains high, and there is no guarantee that individual countries or the EU will be able to reach an agreement with the United States. It is also no certainty that Trump will not change his policies again in the future, which is the essence of the current environment," he said, suggesting that this supports the reason for the ECB to continue to cut interest rates.

Restricted interest rates?

The ECB may make another adjustment on Thursday after it had softened its wording on the extent of interest rate restrictions in March.

Brzeski said the central bank will "have to change its communication methods", suggestingIf the ECB chooses to cut further interest rates, it will indicate that the lower 2.25% deposit rate “will now be within the neutral rate range.”

The ECB's so-called neutral interest rate levels have been a hot topic for months on policy makers, analysts and economists. At a neutral level, interest rates neither stimulate nor restrict the economy and can remain stable.The ECB estimates that the neutral interest rate is between 1.75% and 2.25%.

Deutsche Bank's research economists seem to be hesitant about any potential wording change, saying they believeThursday's wording will remain the same. “Combined with the view that inflation is returning to its target, this implies dovish tendencies.”

US policy casts shadow on ECB interest rate outlook

Deutsche Bank's research economists believe that looking ahead to the European Central Bank's decision on Thursday,The future interest rate path is expected to be "open"。

They do not think the ECB's wording on interest rate outlook will change, i.e. what policymakers say will not promise a specific interest rate path in advance and will make decisions in a data-dependent manner at each meeting.

"This open-ended wording allows policy stance to remain restrictive, to turn neutral or to stimulating based on data," they said, adding,This technically means that the ECB may suspend interest rate cuts in June。

despite this,These economists' forecasts remain that the ECB will cut interest rates further. Investec's Djajasaputra suggests that future policy paths will largely depend on the development of U.S. and global trade.

"After the April meeting, the ECB's interest rate outlook was shrouded and affected by the White House policy decisions," he said, adding that he expects the ECB to cut interest rates again later this year, although the timing of this step will depend on upcoming economic data and other economic developments.