ECB set to cut rates to 2.5%

European Central Bank is set to cut interest rates again on Thursday, in what looks set to be its last easy decision for a while as trade wars and rearmament push the continent into its biggest economic policy turmoil in decades.

With the outlook changing faster than economic models can keep up, and policymakers increasingly divided over the need for further support, attention will focus on the ECB’s signals on future moves. (CNBC)

After slashing borrowing costs rapidly over the past nine months as inflation has fallen and economic growth has slowed, the euro zone central bank is set to cut its deposit rate by another 25 basis points on Thursday, to 2.5%.

At the same time, Germany and the European Commission have announced sweeping changes to fiscal rules aimed at boosting defense and infrastructure spending, in part to offset U.S. support, a tectonic shift that could weigh on growth for years to come.

“This is the last easy cut as the differences mount,” Bank of America analysts said in a note. “We don’t expect a change in direction… but we do expect increased divergence among Governing Council members.”

The ECB will struggle to keep up with the rapidly changing economic outlook, with its new economic forecasts, based on data collected weeks ago, likely to show weaker growth and a slightly higher inflation trajectory.

For now, investors believe the ECB will continue to push ahead. Markets are pricing in two more rate cuts this year after Thursday’s move, slightly lower than before Tuesday’s German budget announcement, but still within the range of expectations seen in the past few weeks.