In the face of the depreciation of the US dollar, the European and British central banks may remain inactive this week

The European Central Bank and the Bank of England are assessing the impact of the weakening dollar and the influx of cheap imported goods on inflation prospects, and are likely to keep key interest rates unchanged this week.

According to Wall Street Insights, on Thursday, February 5, the European Central Bank and the Bank of England will successively announce their interest rate decisions, with the market expecting both to remain steady.

The market is closely watching how the European Central Bank evaluates inflation, which has fallen below target, and the downside risks to growth. The new quarterly forecasts and policy guidance released by the Bank of England will be key to assessing whether it will initiate interest rate cuts in the spring.

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

This situation means that European interest rates will likely remain low for the foreseeable future, but the policy dilemma faced by the central bank is also intensifying—balancing the need to address downward pressure on inflation while guarding against slowing economic growth.

Dollar Depreciation Raises ECB Concerns

Although ECB policymakers believe the current situation is "good," there are still concerns for the future.

If the dollar continues to weaken, it may lower the prices of imported goods and services, weaken Eurozone export demand, and further reduce inflation levels. ECB officials stated:

The strengthening of the euro may be triggered by a more accommodative U.S. monetary policy than expected and the related depreciation of the dollar, which could exacerbate the impact of tariffs and lead to a greater-than-expected decline in inflation.

Francois Villeroy de Galhau, Governor of the Bank of France, stated last week that the European Central Bank is "closely monitoring" the depreciation of the dollar, which "is one of the factors that will guide our monetary policy stance."

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

Lagarde may try to slightly slow the euro's appreciation through verbal intervention, but we believe the euro can appreciate further before there is a need to cut rates again.

According to Wall Street Insights, the Federal Reserve paused interest rate cuts last week, ending the adjustment cycle that began in July last year, and indicated that it is not in a hurry to resume rate cuts.

Cheap Imported Goods Intensify Inflation Pressure

The surge in imported goods has become another factor that may exacerbate inflation pressure, a threat that received widespread attention at the December policymakers' meeting.

Wall Street Insights mentioned that according to the minutes of the ECB's December meeting, the European Central Bank reiterated that inflation should stabilize at the 2% target in the medium term, but the stickiness of service sector inflation and wage growth exceeded expectations.

Policymakers believe that exporters from other countries are "reducing prices faster than in the past" to seek new customers to replace markets lost due to U.S. tariff increases.

ECB economists expect inflation rates to be below target this year, closer to the target by 2027, and not returning to 2% until 2028.

The market currently expects the ECB's key interest rate to remain at 2% this week and emphasizes that they are open to any actions in either direction if the inflation outlook changes

The Bank of England Faces a Similar Predicament

The weakness of the dollar and the surge in cheap imported goods may have a similar impact on the UK.

Alan Taylor, a member of the Bank of England's Monetary Policy Committee, emphasized the threat posed by the surge in imported goods. Unlike the European Central Bank, most Bank of England policymakers agree that interest rates should be cut again this year, but there are differences regarding the timing.

Analysts believe that a rate cut this week seems premature for most, as they need to confirm that wage growth will sufficiently slow to ensure inflation stabilizes around the 2% target after declining in April.

Edward Allenby from Oxford Economics stated:

Most Monetary Policy Committee members expect further rate cuts will be necessary, but they are concerned about the potential intensity of wage adjustments in 2026 and their impact on inflation. We believe that the meeting at the end of April is the most likely time for the next rate cut.

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