In response to the depreciation of the US dollar, the European and British central banks may hold steady this week.

In response to the depreciation of the US dollar, the European and British central banks may hold steady this week.

The European Central Bank and the Bank of England are assessing the impact of a weaker dollar and a surge in cheap imported goods on the inflation outlook, and may hold key interest rates unchanged this week.

According to WallstreetCN, on Thursday, February 5th, the European Central Bank and the Bank of England will release their interest rate decisions one after another, and the market expects both to stand pat.

The market is closely watching how the ECB evaluates inflation, which has dropped below target, and downside risks to growth. The BOE’s new quarterly forecast and policy guidance will be key to assessing whether it may start cutting rates in the spring.

The ECB has not adjusted borrowing costs since last June, and investors expect little action in the coming months. The Eurozone’s annual inflation rate at the end of last year was slightly below the Central Bank’s 2% target, with stronger than expected economic growth in 2025.

This situation means European interest rates will likely remain low for the foreseeable future, but policy dilemmas facing the central bank are intensifying—balancing downward pressure on inflation against the risk of slowing economic growth.

Dollar Depreciation Draws ECB Attention

Although ECB policymakers consider the current state "good," there are still future concerns.

If the dollar continues to weaken, it may lower prices of imported goods and services, and undermine export demand from the euro area, further pressing down inflation. ECB officials said:

Euro strength may be triggered by more accommodative US monetary policy than expected and consequent dollar depreciation, which could exacerbate the impact of tariffs and lead to an even greater than expected drop in inflation.

François Villeroy de Galhau, Governor of France’s central bank, said last week that the ECB is "closely watching" dollar depreciation, calling it "one of the factors guiding our monetary policy stance."

ECB President Christine Lagarde may face related questions at the post-decision press conference. Rabobank's Bas van Geffen said:

Lagarde may try to use verbal intervention to slightly slow the euro’s rise, but we believe the euro can continue appreciating further before the need for another rate cut emerges.

According to WallstreetCN, last week the US Federal Reserve paused on interest rate cuts, ending the adjustments made since July last year and implying no rush to resume lowering rates.

Cheap Imported Goods Intensify Inflation Pressure

A surge in imported goods has become another factor possibly intensifying inflation pressure, and this threat was widely discussed at decision-makers’ December meeting last year.

WallstreetCN mentioned that, according to the ECB’s December meeting minutes, the ECB reiterated that inflation should stabilize at the 2% target in the medium term, but service sector inflation and wage growth have been stickier than expected.

Policymakers believe exporters from other countries are "reducing prices faster than before" to find new customers, offsetting lost markets due to higher US tariffs.

ECB economists expect inflation to be below target this year, closer to the target in 2027, and only to return to 2% by 2028.

The market currently expects the ECB’s key rate to remain at 2% this week, and emphasizes that if the inflation outlook changes, they are open to action in either direction.

Bank of England Faces Similar Dilemmas

Dollar weakness and a surge in cheap imported goods may have similar effects in the UK.

Alan Taylor, member of the Bank of England's monetary policy committee, emphasized the threat posed by the surge in imported goods. Unlike the ECB, most BOE policymakers agree that rates should be cut again this year, though they differ on timing.

Analysts believe this week may be too soon for a rate cut for most, as they need confirmation that wage growth will slow enough to ensure inflation can stabilize near its 2% target after the April drop.

Edward Allenby from Oxford Economics said:

Most monetary policy committee members expect further rate cuts will be necessary but are concerned about the potential strength of pay adjustments in 2026 and its impact on inflation. We believe the end-April meeting is the most likely time for the next rate cut.

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