ECB at a crossroads

The European Central Bank (ECB) must now decide whether to continue cutting or stop cutting its key interest rates.

From 2022 to 2024, the ECB raised the policy rate from approximately 0% to 4%, but then reduced it 5 times and now it is 2.75%. The upcoming decision is really difficult for the ECB because the need to reduce the policy rate is still urgent while the pressure has not decreased, and may even have to increase more and more strongly.

European Central Bank (ECB) headquarters in Germany

Normally, once the US Federal Reserve (Fed) has reduced its operating interest rate, the ECB will also reduce it. The Fed has reduced its base interest rate many times and now it has stopped. The new US administration has increased pressure very strongly for the Fed to continue lowering the base interest rate instead of stopping. Meanwhile, the economy of the eurozone is still growing slowly and unstable. The ECB is under great pressure from politicians to continue reducing the base interest rate to promote strong growth and to make it easier for governments to borrow more from the financial and monetary markets.

At the same time, the ECB is now under pressure to raise its policy rate or at least not to continue lowering it from three aspects. First, the general inflation rate for the euro area is still almost 1.5 times higher than the target pursued by the ECB. Second, EU member states are currently looking for new sources of finance to spend on Ukraine and will choose to increase public debt, which will increase inflation. Third, the inevitable trade war between the US and the EU will also weaken the euro.

Either way, the ECB's decision will have two-pronged effects. It is therefore likely that the ECB will cut its benchmark interest rate one last time before either ceasing cuts or gradually increasing them.

Source: https://thanhnien.vn/ecb-truoc-nga-ba-duong-185250304220500955.htm