European markets set for higher open ahead of expected ECB rate cut with Lagarde

European markets are set to open higher on Thursday as investors await the European Central Bank’s (ECB) latest monetary policy decision. Economists are predicting the central bank will lower its key interest rate by 25 basis points to 2.5%, marking its second rate cut this year, following the eurozone’s inflation rate slowdown seen in 2025 so far.

Just a few hours before markets opened, stock indices across Europe, like the U.K.’s FTSE 100, rose by 43 points to 8,779, Germany’s DAX gained 75 points to 23,185, and France’s CAC climbed 52 points to 8,249. Italy’s FTSE MIB recorded the largest increase, surging 307 points to 38,905, according to IG data.

Markets had already priced in the quarter-point cut by Wednesday, anticipating that the ECB’s rate would drop to 2.5%, down from its 4% peak last year. Analysts also expect a further reduction to 2% by the end of 2025.

Debate over rate path continues

The ECB’s rate-cutting cycle has been largely driven by headline inflation in the eurozone consistently falling below 3% and economic growth remaining weak. The board seemingly agrees on easing the rates, but there are some internal divisions over how far and how fast they should be reduced.

The ECB’s Governing Council, which had always reached decisions with strong consensus, now appears divided on the appropriate level for the so-called “neutral rate”—the point at which monetary policy neither stimulates nor restricts the economy. 

President Christine Lagarde previously estimated this range to be between 1.75% and 2.5%, though she recently revised it to between 1.75% and 2.25%. 

Bank of America Global Research analysts said in a note Wednesday that the upcoming rate cut could be the last “easy” decision before disagreements among policymakers become more pronounced. They forecast the ECB will lower rates to 1.5% by September, a more aggressive stance than the market consensus.

“We don’t think the guidance will change … but we would expect growing disagreement among Governing Council members,” a BOA spokesperson told Reuters.

Goldman Sachs analysts supported the sentiment, stating that the Governing Council is purportedly eyeing if financial conditions, bank lending, and business activity indicate that policy remains restrictive.

The ECB is scheduled to announce its policy decision at 13:15 GMT, followed by Lagarde’s press conference at 13:45 GMT, where she is expected to provide further clarity on the central bank’s future course.

Geopolitical risks and fiscal policy complications

Rate cuts are traditionally intended to stimulate economic growth, but several factors stand in the way of the ECB’s decision-making process. A foreshadowed trade conflict with the United States, which economists believe is “inevitable,” has made firms hesitant to commit capital, fearing they will face reduced demand. 

Germany and the European Commission have announced changes to fiscal policies. They are looking to increase defense and infrastructure spending, in part to compensate for “shaky” US support.

Some policymakers, such as ECB Executive Board member Isabel Schnabel, are calling for the central bank to consider a pause in rate cuts or even halting them altogether. As it stands, however, there has been little pushback against the expected 25-basis-point reduction. 

If approved, this move would bring cumulative easing since June to 150 basis points, twice as much as the Bank of England’s total cuts so far and also more than the Federal Reserve’s 100 basis points of reductions.

David Powell, senior euro-area economist, talked about the contrasting views among ECB officials, saying:  

“The hawks believe monetary policy may no longer be restrictive once the deposit rate falls to 2.5% in March. The doves, however, emphasize the need to consider the shrinking ECB balance sheet when assessing the final rate level,” 

Powell expects the ECB to cut rates by another 75 basis points this year to bring the deposit rate down to 2%.

Economic prospects challenge ECB projections

The ECB’s latest economic projections are expected to show weaker growth and a slightly higher inflation outlook. That said, policymakers could more than likely take a more pragmatic approach, recognizing that global economic conditions have changed since the predictions were compiled in end-2024.

TS Lombard’s Davide Oneglia noted that several dynamics could slow down the ECB’s rate-cutting cycle, including reassessments of economic growth, declining wages, and the lagging effects of fiscal policy changes. 

“There will be pressure to slow down ECB easing, owing to growth re-rating, although cooling wages and employment, lags in fiscal policy effects, and escalating U.S. tariff threats against the EU keep a sub-2% deposit rate as the base case,” said Oneglia.

For market analysts, the language used by the ECB in its policy statement is one to watch. If the central bank drops the phrase that policy “remains restrictive,” it could signal that officials see their objectives as attainable. 

Still, such a change would not necessarily move them towards an immediate pause in rate cuts but shows that the Governing Council decisions are uncertain.

Cryptopolitan Academy: Tired of market swings? Learn how DeFi can help you build steady passive income. Register Now