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ECB Eyes Trump’s Crypto Plan to Accelerate Digital Euro Development

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The European Central Bank (ECB) hopes that U.S. President Donald Trump’s support for cryptocurrencies pegged to the U.S. dollar will speed up legislative progress for the digital euro, according to ECB board member Piero Cipollone. The ECB sees its digital euro as an alternative electronic payment method that could lessen Europe’s dependence on U.S. companies like Visa and PayPal.

Cipollone noted that Trump’s backing of globally available stablecoins tied to the U.S. dollar would further expand U.S.-dominated payment systems, adding urgency to the digital euro initiative. The European Commission proposed digital euro legislation in June 2023, but progress has been slow amid skepticism from some lawmakers and financial institutions.

“The political world is becoming more alert to this,” Cipollone said in a recent interview. “And it’s possible that we will see an acceleration in the process.” He expressed hope that the European Parliament and Council would finalize their work on the legislation by summer, allowing for negotiations with the Commission. If all goes as planned, the rules could be finalized by November, when the ECB is set to decide whether to launch the digital euro.

EU lawmaker Markus Ferber mentioned that the Parliament might only have a report ready by summer, signaling slower progress than expected.

Cipollone raised concerns about the growing use of U.S. stablecoins, as they could encourage Europeans to transfer their deposits to the U.S. in favor of using dollar-backed stablecoins for payments. This shift, he argued, would further strain European banks as they lose deposits to U.S. platforms.

Bankers are also wary of the digital euro, fearing that it could lead customers to move their funds into ECB-backed digital wallets. To alleviate such concerns, the ECB has proposed capping the holdings in digital euro wallets at a few thousand euros and not offering interest on these deposits.

Globally, other countries, including Nigeria, Jamaica, and the Bahamas, have already launched central bank digital currencies (CBDCs), with 44 other nations, including Russia, China, and Brazil, running pilots. In contrast, Trump has prohibited the U.S. Federal Reserve from issuing its own CBDC.

 

European Central Bank Poised for Third Interest Rate Cut of the Year Amid Easing Inflation Risks

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The European Central Bank (ECB) is expected to deliver its third interest rate cut of the year during its meeting this Thursday, as policymakers express growing confidence that inflation is easing faster than anticipated. Recent data indicates that inflationary pressures in the euro area have continued to soften, further bolstering expectations for a rate reduction.

In September, headline inflation in the eurozone dropped to 1.8%, falling below the ECB’s 2% target. Core inflation, which excludes volatile components like energy and food, reached a two-and-a-half-year low of 2.7%, signaling that the ECB’s tightening measures have been effective in curbing price growth.

Declining Inflation and Rate Cuts

The ECB had already implemented two 25-basis-point interest rate cuts earlier this year — one in June and another in September — bringing the central bank’s deposit facility rate from a record high of 4% to 3.5%. These cuts followed a sustained period of high inflation driven by global energy prices and supply chain disruptions.

Given the improving inflation outlook, money markets are now predicting another 25-basis-point cut during the October meeting, with further expectations of an additional reduction to 3% by the ECB’s final meeting of the year in December.

Recent dovish remarks from ECB officials, coupled with cooler inflation figures from key eurozone countries like Germany, have solidified the expectation of back-to-back rate reductions. Francois Villeroy de Galhau, Governor of the Bank of France, stated last week that a rate cut in October was “very likely” and hinted that this cut would not be the last in the current cycle.

Victory Over Inflation in Sight?

ECB President Christine Lagarde signaled a shift in policy during her address to European Union parliamentarians last month. She expressed optimism that inflation was on track to return to the ECB’s target, signaling a potential “pivot” in the central bank’s approach to monetary policy. This contrasts with her more cautious stance during the Sept. 12 meeting, where she emphasized a gradual approach to easing.

Even Joachim Nagel, head of Germany’s Bundesbank and a known hawk on inflation, acknowledged the positive trend, suggesting he would be open to discussing another rate cut.

Economic Weakness and Growth Concerns

In addition to easing inflation, the eurozone economy continues to face significant challenges. Economic activity remains sluggish, with the latest composite purchasing managers’ index (PMI) showing signs of stagnation for the third quarter. This follows a weak 0.3% growth in the second quarter.

The prolonged period of tight monetary policy has exerted downward pressure on growth, with sectors like German manufacturing facing competitiveness issues. Economists, such as Jack Allen-Reynolds from Capital Economics, have revised their forecasts to predict ongoing rate cuts until the ECB’s deposit rate reaches 2.5%. This projection also reflects a cooling labor market and slower wage growth, which should help reduce services inflation in the coming months.

The ECB’s own projections have also been revised downward, with the bank now expecting 0.8% GDP growth for the eurozone in 2024, slightly lower than the 0.9% previously forecast.

A Careful Balance

Despite the growing momentum for rate cuts, some analysts caution that the ECB risks overreacting by easing monetary policy too aggressively. Holger Schmieding, chief economist at Berenberg, warned that while inflation may not be a major issue in 2025, the central bank could face renewed inflationary pressures in 2026 and 2027. He argues that if the ECB lowers rates too quickly, it may have to raise them again in the future to prevent wage inflation and increased consumer demand from pushing prices higher.

Schmieding also predicted that Lagarde is unlikely to push back against market expectations for a December cut during her press conference on Thursday, effectively solidifying the likelihood of continued easing in the months ahead.

Looking Forward

As the ECB navigates this critical juncture, the global economic environment remains a significant factor. The recent 50-basis-point rate reduction by the U.S. Federal Reserve has heightened expectations for faster monetary easing across the globe, putting additional pressure on the ECB to follow suit.

Economists at Bank of America Global Research believe that this week’s rate cut could mark the beginning of a broader trajectory that sees rates lowered to 2% by June 2025 and further to 1.5% by the end of 2025. However, the ECB is expected to maintain its data-dependent and meeting-by-meeting approach, avoiding any definitive long-term commitments.

With the eurozone’s inflation risks appearing to subside and growth concerns still prevalent, the ECB faces the delicate task of balancing monetary easing with the need to avoid reigniting inflationary pressures down the line.

European Central Bank Set to Slash Interest Rates Ahead of U.S. Federal Reserve’s Decision

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The European Central Bank (ECB) is expected to cut interest rates by 25 basis points this Thursday, just days before the U.S. Federal Reserve (Fed) begins its own rate-cutting cycle. This move follows a series of aggressive rate hikes in the euro area, as both central banks respond to shifting economic conditions and inflationary pressures.

According to market expectations, the Fed is likely to follow suit with its own rate cut during its upcoming meeting on September 17-18. While the ECB’s decision has been widely anticipated, the Fed’s move could mark the start of a broader trend of monetary easing in advanced economies.

Holger Schmieding, chief economist at Berenberg Bank, described the ECB’s decision as “largely uncontroversial,” noting that recent remarks from ECB officials, including Bundesbank President Joachim Nagel, have indicated broad support for a rate cut. The ECB’s current interest rate sits at 3.75%, following years of aggressive rate hikes aimed at controlling inflation, but with recent inflation data showing a decline, the central bank is ready to shift gears.

Inflation in the eurozone has softened, with headline figures in August reaching a three-year low of 2.2%. However, core inflation remains slightly elevated at 2.8%, driven by the services sector. The ECB’s rate cut is seen as a response to these mixed signals, as well as to concerns about weakening domestic demand and slowing confidence in key economic sectors.

The ECB is also expected to release updated staff projections this Thursday, but analysts don’t foresee major revisions to inflation or growth figures. However, some economists, such as Anatoli Annenkov from Société Générale, warn that the outlook for growth may be more pessimistic than it was in July, with weakening confidence and sluggish demand raising concerns about the broader economic landscape.

As the ECB prepares to act, attention will shift to what comes next. While the central bank is likely to pause rate cuts in October, there is an outside chance that further reductions could come sooner. ECB Chief Economist Philip Lane has hinted at the possibility of a faster rate-cutting cycle to avoid the risks of keeping rates too high for too long. He also stressed that the ECB needs to ensure inflation stays at its 2% target once it reaches that level, avoiding both over- and undershooting the mark.

With the ECB navigating these complexities, the central bank’s moves are being closely watched as it seeks to balance growth concerns with inflationary pressures across the euro area.