By Dhara Ranasinghe and Stefano Rebaudo

LONDON (Reuters) – The European Central Bank (ECB) is expected to cut rates again on Thursday as inflation declines. Financial markets are eager to understand if the challenging environment will prompt quicker actions ahead.

Since the October meeting, Donald Trump's election has increased tariff risks for Europe, while France and Germany face political turmoil. Additionally, business activity has slowed, and the euro has depreciated.

Pictet Wealth Management's head of macroeconomic research, Frederik Ducrozet, stated, "It makes no sense to be hawkish right now."

Key Questions for Markets:

1. Will the ECB cut rates by a quarter or half-point?

Traders are leaning towards a 25 basis points (bps) cut, marking the fourth reduction this year and suggesting consecutive rate cuts. A drop in November business activity has led to discussions of a significant December reduction, with ECB’s Francois Villeroy de Galhau indicating that a bigger cut may be considered. However, most policymakers favor a modest reduction, as inflation increased last month and U.S. tariff policies remain uncertain. Positive data, like rising housing loan demand, supports a cautious approach. ING Research’s Carsten Brzeski expects a 25 bps cut, acknowledging inflationary pressures.

2. What do Trump tariffs mean for ECB policy?

The implications are unclear. While tariffs are likely detrimental to growth, their effect on inflation is uncertain. Trump’s proposed 10% tariffs on imports could significantly impact the eurozone’s output, with Goldman Sachs expecting a 0.5% impact. Concerns also extend to potential trade wars negatively affecting all countries, not just those directly targeted.

3. Could the ECB speed up rate cuts?

Yes, especially if a marked economic slowdown affects inflation. Money markets predict 150 bps of cuts by the end of 2025, a revision from earlier estimates. Economists suggest that rates may need to fall below the neutral 2%-2.5% range for effective support.

4. What is going on with inflation?

Consumer price inflation has accelerated in November, with key components remaining high, leading to ECB caution on rate cuts. Inflation seems to be on a path to hit the 2% target, with easing wage pressures. The ECB’s growth and inflation forecasts may be adjusted downwards for 2025.

5. Could the ECB intervene to support French bonds?

Not at this time. France currently does not meet the criteria for support under the Transmission Protection Instrument, which allows the ECB to buy bonds of eurozone members facing unwarranted selloffs. French borrowing costs have decreased amid speculation regarding rate cuts, and stability has been noted in other markets. However, if pressure increases regarding France’s political crisis and rising borrowing premiums, ECB’s Lagarde may face tougher questions despite current stability.