European central banks set to hold rates as dollar weakens

Major central banks across Europe are preparing to keep their benchmark interest rates at current levels on Thursday, following the same approach taken by the Federal Reserve in its most recent decision.

Both institutions are watching closely as a falling American dollar and a wave of low-priced goods from China threaten to reshape inflation forecasts.

The European Central Bank has held borrowing costs steady since last June, and financial markets aren’t anticipating any moves in the coming months. Inflation across the euro area closed out the previous year just under the bank’s 2% goal, while the economy grew more robustly than forecasters had predicted throughout 2025.

Dollar decline poses threat to inflation targets

Despite officials feeling comfortable with current conditions, warning signs are emerging. The bank’s economic team projects inflation will fall short of target levels this year and into 2027, only climbing back to the 2% mark in 2028.

A continued slide in the dollar’s value could drive inflation even lower through two channels: cheaper prices on goods and services brought in from abroad, and reduced demand for products exported from eurozone countries.

Francois Villeroy de Galhau, who leads France’s central bank, told reporters last week that officials are “closely monitoring” the dollar’s drop, calling it “one of the factors that will guide our monetary policy stance.”

The weakening American currency will be a key discussion point among policymakers, and Christine Lagarde, who heads the ECB, will probably field multiple questions about it during her press briefing after the rate decision.

“Lagarde may try to slow the euro’s momentum a bit with verbal intervention, but we think the currency can appreciate quite a bit further before it would warrant another rate cut,” noted Bas van Geffen from Rabobank.

A flood of Chinese products entering European markets presents another risk to inflation. This issue grabbed significant attention when officials gathered for their December meeting.

Minutes from that December session, released at the end of last month, showed that rate setters determined Chinese companies had cut their prices “more quickly than in the past” while hunting for new buyers to make up for customers lost due to increased American tariffs.

“A stronger euro, possibly prompted by a more accommodative U.S. monetary policy than expected and associated dollar depreciation, could add to the effects from tariffs and bring inflation down further than expected,” officials wrote in their summary.

Rate setters are projected to maintain the ECB’s main interest rate at 2% while making clear they’re prepared to adjust in either direction if inflation forecasts shift. The Federal Reserve kept its primary rate unchanged last week for the first time since July, showing little rush to restart cuts.

UK officials debate timing of next rate cut

Britain faces similar pressures from dollar weakness and cheap Chinese goods, though inflation runs higher there compared to the eurozone.

Alan Taylor, who sits on the Bank of England’s Monetary Policy Committee, has pointed to the danger posed by surging Chinese imports. However, other committee members seem more focused on challenges within Britain’s borders.

Unlike the ECB, most Bank of England officials agree another rate reduction should happen this year, but they differ on when to make the move. Next week appears too early for a majority to feel confident that wage growth will slow enough to bring inflation down to the 2% target following an expected drop in April.

“The majority of MPC members anticipate further rate cuts will be required, but they are concerned about the potential strength of 2026 pay awards and their impact on inflation,” said Edward Allenby from Oxford Economics. “We see the end-April meeting as the most likely timing for the next cut.”

The decisions come as central banks on both sides of the Atlantic navigate uncertain economic terrain, balancing concerns about slowing inflation against the need to support economic growth.

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