By Balazs Koranyi

FRANKFURT (Reuters) – The European Central Bank (ECB) is expected to cut interest rates for the seventh time in a year on Thursday, aiming to support a struggling economy facing significant impacts from U.S. tariffs.

The ECB has been rapidly lowering borrowing costs as price pressures diminish, and global market instability is likely to reinforce the bank’s belief that euro zone inflation is manageable, justifying further policy easing.

However, ECB President Christine Lagarde is not anticipated to provide many insights on future actions, emphasizing that uncertainty is too great for the bank to commit to firm plans, and decisions will depend on incoming data.

Although U.S. President Donald Trump has halted most tariffs, many remain, and market volatility has caused damage already.

“Even with the U.S. tariff pause, the arguments now clearly favour a cut,” Deutsche Bank noted. “The impact on growth from tariffs, uncertainty, and financial conditions likely exceeds the ECB’s expectations.”

The ECB previously estimated that growth in the 20 euro-using countries could decline by half a percentage point due to tariffs, erasing about half of the bloc’s anticipated growth. This estimate might be optimistic if Trump reinstates larger trade barriers or the European Union retaliates.

The upheaval from inconsistent U.S. trade policies may also influence prices and assist the ECB in achieving its inflation targets more swiftly.

The euro has strengthened among the market volatility, energy prices have sharply dropped, growth is likely to decelerate due to weaker trade, and China, the primary target of U.S. tariffs, could divert some of its output to Europe.

Morgan Stanley argues that, based on current market conditions, inflation may soon drop below the ECB’s 2% target. “The revised assumptions push headline inflation meaningfully down, below 2.0% starting in the second quarter,” they stated. “It is possible that euro area inflation stays below target for most of 2026.”

A final rationale for a rate cut of 25 basis points, reducing the deposit rate to 2.25%, is that the market has fully anticipated this move, and the ECB wouldn’t want to unsettle already anxious markets.

LAGARDE CLUES

While the decision is largely regarded as certain, investors will scrutinize Lagarde’s comments at a press conference scheduled for 1245 GMT for indications regarding future policies.

They will assess whether the ECB continues to describe rates as restrictive, which would suggest that further easing remains likely.

Investors will also be looking for updates on the implications of trade barriers. Although Lagarde provided some figures last month, the ECB’s staff is currently refining forecasts, and she may share additional insights, despite new official projections not being expected until June.

Lagarde may be questioned regarding the anticipated effects of a surge in German government spending from the newly formed coalition government, which has pledged significant investments in defense and infrastructure.

However, she is likely to sidestep these queries, as the ECB traditionally only assesses the effects of enacted policies rather than proposals.

Nonetheless, such spending is expected to further boost growth and inflation in the future, potentially necessitating a reversal of rate cuts by the ECB.

UBS economist Reinhard Cluse believes that the ECB may need to consider raising borrowing costs next year to mitigate the inflationary impact of fiscal stimulus. “We predict that the ECB might have to increase rates in late 2026 to prevent inflation from exceeding targets in 2027,” Cluse stated. “We anticipate two increases of 25bps each in September and December 2026, to 2.5%, which would be moderately above neutral.”