(Bloomberg) — European Central Bank officials are bracing for tough negotiations over whether to cut interest rates further or hold fire when they next set borrowing costs in April, according to people familiar with their thinking.
Most Read from Bloomberg
Dovish policymakers currently see little reason to pause, said the people, who asked not to be identified discussing confidential conversations. Their more hawkish colleagues, though, are leaning toward a timeout to study geopolitical risks and the implications of a huge ramp-up in European defense spending, the people said.
With inflation cooling toward 2%, there’s been scant pushback against the six quarter-point reductions in the ECB’s deposit rate since last June. President Christine Lagarde said the latest, on Thursday, was unopposed. Only Austria’s Robert Holzmann abstained.
Policymakers welcomed a compromise on the ECB’s statement language that describes the policy stance as “becoming meaningfully less restrictive,” with both camps seeing it as useful in conveying their opinions on rates in the coming weeks, the people said.
An ECB spokesperson declined to comment.
Lagarde referred repeatedly to elevated uncertainty, with US President Donald Trump’s decision to step back from defending Ukraine and Europe triggering a rush to rearm. Those investments, as well as the ongoing risk of US trade tariffs, make predicting economic growth and inflation trickier.
Speaking Friday, France’s Francois Villeroy de Galhau acknowledged “enormous uncertainty,” saying policymakers must keep their options open while standing ready to act as events unfold.
“If the data indicates that the most appropriate monetary-policy stance is a cut, it will be a cut,” Lagarde said on the path ahead. “If, on the other hand, the data indicates that the most appropriate decision is not to cut, then it will be a pause.”
Money markets are equally undecided. Traders currently price about 12 basis points of easing for next month after growing more cautious that Europe’s military outlays will stoke economic expansion and fan inflation.
“We expect higher growth rates in the euro area and a slowdown in the disinflationary process,” said Ulrike Kastens, a senior economist at DWS. “All this will significantly reduce the scope for further interest-rate cuts in the coming month.”
