By Brian Swint

The European Central Bank is expected to break from the Federal Reserve on Thursday, opting to keep cutting interest rates instead of pausing.

The ECB and the Fed are now at different junctures. The U.S. economy is still showing reasonable growth while inflation hasn't fallen back to the central bank's target. In Europe, the economic outlook is markedly weaker.

Europe's inflation rate is above target in the 20 countries sharing the euro, but ECB President Christine Lagarde has said officials are confident it will return to the 2% goal by the end of 2025. Unlike for the Fed, the question isn't whether the ECB will keep cutting, but how much more it will cut. The benchmark deposit rate currently stands at 3%.

"The next two cuts seem to be consensual now, but the path thereafter not," said Bank of America strategists led by Ruben Segura-Cayuela. "Data will ultimately force the ECB to continue cutting to a terminal of 1.5% if not lower."

President Donald Trump's pledge to raise tariffs on imports is overshadowing Europe, which relies heavily on the U.S. market for international sales. So far, Europe hasn't come in Trump's crosshairs.

Lagarde will hold a press conference to explain the decision. The ECB started cutting rates earlier than the Fed last year, in June rather than September. It has moved in quarter-point increments and is expected to move the deposit rate to 2.75% on Thursday.

The euro area's two biggest economies are in turmoil, rocked by political instability. Germany's ruling coalition collapsed last year and new elections will be held in February. The country's economy hasn't grown meaningfully for years. France's parliamentary elections, held in the middle of last year, led to a divided government. Prime Minister Michel Barnier resigned after three months in office.

By contrast, Spain, the fourth-biggest economy in the euro bloc, is doing very well. It expanded 0.8% in the fourth quarter, outperforming its larger peers by some margin and underscoring divisions among individual countries that make the ECB's decision trickier.

The Bank of England, which sets interest rates for the U.K., is also coping with a weak economy. It's expected to lower interest rates when it meets next week.

Write to Brian Swint at brian.swint@barrons.com

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January 29, 2025 15:43 ET (20:43 GMT)

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