ECB Insight: Policymakers in Davos Backed 25BP Cut, Fretted Less About Trump

28 January 2025

ECB Insight: Policymakers in Davos Backed 25BP Cut, Fretted Less About Trump

By Marta Vilar – MADRID (Econostream) – The World Economic Forum Annual Meeting in Davos, Switzerland came to a close at the end of last week, but the convenient timing of the event just before the European Central Bank’s quiet period ensured a flow of comments from Governing Council members worth looking back at.

Members from both ends of the hawk-dove spectrum publicly backed a standard rate cut for this Thursday.

Confronted with the question as to what they expected the ECB to decide on January 30, Deutsche Bundesbank President Joachim Nagel, De Nederlandsche Bank Governor Klaas Knot and Banco de España Governor José Luis Escrivá all subtly agreed that a 25bp cut was coming.

Despite making it clear that there was ‘never a done deal’ prior to an ECB meeting, Nagel said, ‘I think there is a certain probability that it [a 25bp cut] could be a done deal, but we have to check the data and we will see.’

Escrivá also resorted to using probabilities, labelling a 25bp cut ‘the most likely scenario’.

Meanwhile, Knot simply stated that he was ‘pretty comfortable’ with market expectations calling for 25bp cuts in January and March.

Even Banque de France Governor François Villeroy de Galhau, previously identified as the leader of a loud minority backing 50bp, seemed to accept the inevitable, at least as far as January is concerned.

‘If we are decisive enough about this pace of the cuts, we don’t need now to increase the magnitude of the cuts, which could be another debate’, he said in an interview.

Still, he added with respect to a larger move that he ‘wouldn’t exclude this possibility for the future’.

For others, including ECB President Christine Lagarde, the question of 50bp was not worth dwelling on, as she suggested in a rather stream-of-consciousness comment:

‘[W]ho cares about being jumbo, we want to get to target’, she said. ‘We’ll do what we have to do, but at the moment, I think that having started early enough … and moving gradually and predictably indicating very clearly that we will remain data dependent…’

Coinciding as the WEF did with US President Donald Trump’s return to power, policymakers naturally reacted to his first pronouncements.

Their comments in this regard suggested no great worry about the potential for Trump’s policies to generate new inflationary pressures in the Eurozone, even if they acknowledged that they would be paying special attention to the exchange rate.

Lagarde for example said the ECB was not ‘overly concerned by the sort of export of inflation to Europe’.

These words were echoed by Villeroy, who said that Trump’s program would potentially increase inflation in the US but that ‘[o]n the European side, I don’t think the inflationary effects would be that significant’.

National Bank of Slovakia Governor Peter Kažimír, who was not at the WEF, also said in an interview last week that the negative consequences of Trump’s measures for growth were more worrying than for inflation.

Nonetheless, Council members could not ignore the potential effect of a weak euro on the ECB’s price stability mandate.

Lagarde described it as one of the ‘interesting phenomena that we will watch’ and said it ‘might have consequences’, while Kažimír acknowledged that the ECB was monitoring EURUSD movements ‘because it might influence inflation via import prices.’

There was never much doubt about what the ECB was most likely to decide two days from now. After Davos, there is even less.