European Central Bank (ECB) officials are preparing for intense discussions over whether to reduce interest rates further or hold steady when they next set borrowing costs in April, Bloomberg reports.
Sources familiar with the internal deliberations indicate a divide among policymakers, with some advocating for a continued rate cut, while others push for a pause to assess evolving geopolitical risks and significant defense spending increases in Europe.
Dovish members of the ECB believe there is little reason to halt the current trajectory, given inflation is cooling toward the 2% target, and there has been minimal resistance to the six quarter-point cuts already made since June. President Christine Lagarde noted that the latest rate reduction, announced on Thursday, was implemented without opposition, with only Austria’s Robert Holzmann abstaining from the decision.
Despite the overall agreement on the direction of policy, there are diverging views on how quickly the ECB should proceed. Some hawkish officials are calling for a wait-and-see approach to better understand the economic impact of higher European defense spending and shifting geopolitical dynamics, especially in light of uncertainties surrounding US foreign policy and trade tariffs.
Lagarde has stressed the elevated uncertainty surrounding Europe’s economic outlook, pointing to the complexities arising from defense investments and the risks related to US policies. She emphasized that any future rate changes will be data-dependent, stating:
“If the data indicates that the most appropriate monetary-policy stance is a cut, it will be a cut. If, on the other hand, the data indicates that the most appropriate decision is not to cut, then it will be a pause.”
Market expectations are similarly mixed, with traders pricing in only a modest 12 basis points of easing for April, reflecting growing concerns that increased military spending in Europe could boost economic growth and potentially stoke inflation. Ulrike Kastens, a senior economist at DWS, noted that higher growth rates in the euro area, combined with a slowdown in disinflationary pressures, could reduce the likelihood of further rate cuts in the near term.
