The European Central Bank cut interest rates for the seventh time in a year on Thursday, looking to prop up an already struggling euro zone economy that will take a large hit from U.S. tariffs.
The ECB has been lowering borrowing costs as post-pandemic price pressures retreat, and recent trade-related turmoil on global markets is adding to the case for further policy easing.
"Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions," the ECB said. "These factors may further weigh on the economic outlook for the euro area."
But ECB President Christine Lagarde is unlikely to offer many clues about the future, sticking instead to her line that uncertainty remains far too great for the bank to commit to anything, and it will decide its next steps as data come in.
While U.S. President Donald Trump has paused most tariffs, many remain in place and volatility in financial markets has already done damage to the economy.
This led the vast majority of economists polled by Reuters to expect Thursday's cut, which lowered the rate that the ECB pays on bank deposits by 25 basis points to 2.25%.
This is the top of the 1.75%-2.25% range that the ECB has defined as "neutral", neither boosting nor restricting economic activity.
Accordingly, the ECB removed a reference to interest rates being "restrictive" from its press release.
TARIFF HIT
Lagarde said last month the ECB estimated that growth across the 20 countries that share the euro could fall by half a percentage point if the United States imposes a 25% tariff on EU imports and the bloc retaliates, erasing about half the euro zone's expected expansion.
But that estimate has been seen as too optimistic, particularly if a trade war wreaks havoc with investor, business and consumer confidence.
While the ECB expected a trade war to increase inflation by 50 basis points, the turmoil caused by erratic U.S. trade policy could equally detract from it. Nearly all financial indicators impacting prices have shifted dramatically in recent weeks.
The euro has firmed 9% amid the volatility and trades at an all-time high on a trade-weighted basis, energy prices are sharply lower, growth is slowing, and China, the number one target of U.S. tariffs, could dump some of its output on Europe.
A number of investment banks have trimmed their forecasts for euro zone inflation this year, often lowering it to or below the ECB's 2% target.
"Disinflationary forces are piling up," HSBC wrote in a note as it cut its inflation forecast to 1.9% for this year and 1.8% for the next.
Ahead of the meeting investors were seeing at least two more cuts this year with some even pricing a third as growth falters.
LAGARDE CLUES
ECB watchers will sift through Lagarde's comments at a 1245 GMT press conference for clues about future policy.
They will want to see if the ECB maintains a reference to rates being restrictive. Such a phrase would signal that more policy easing remains the baseline.
A possible update on the impact of trade barriers was also in focus as staff were expected to refine its estimates even before new official projections are published in June.
Investors will also want to see if Lagarde offers any signal beyond the usual that ECB decisions are "data-dependent" and will be taken "meeting by meeting".
Finally, Lagarde is likely to be asked if the central bank can estimate the impact of an expected surge in German government spending under the new coalition government, which has promised big defence and infrastructure investments.
Lagarde is likely to deflect these questions, however, as the ECB tends to estimate only the impact of enacted policy rather than proposals.
The spending is nevertheless likely to boost both growth and inflation further out, possibly forcing the ECB to reverse rate cuts.
Unlike the majority of his peers, UBS economist Reinhard Cluse argues that the ECB will need to start hiking borrowing costs next year to prevent this fiscal stimulus from pushing prices up again.
"We believe the ECB might have to hike rates again in late 2026 to prevent an overshooting of inflation in 2027," Cluse said. "We factor in two hikes of 25bps each in September and December 2026, to 2.5%, moderately above neutral."
The ECB has been lowering borrowing costs as post-pandemic price pressures retreat, and recent trade-related turmoil on global markets is adding to the case for further policy easing.
"Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions," the ECB said. "These factors may further weigh on the economic outlook for the euro area."
But ECB President Christine Lagarde is unlikely to offer many clues about the future, sticking instead to her line that uncertainty remains far too great for the bank to commit to anything, and it will decide its next steps as data come in.
While U.S. President Donald Trump has paused most tariffs, many remain in place and volatility in financial markets has already done damage to the economy.
This led the vast majority of economists polled by Reuters to expect Thursday's cut, which lowered the rate that the ECB pays on bank deposits by 25 basis points to 2.25%.
This is the top of the 1.75%-2.25% range that the ECB has defined as "neutral", neither boosting nor restricting economic activity.
Accordingly, the ECB removed a reference to interest rates being "restrictive" from its press release.
TARIFF HIT
Lagarde said last month the ECB estimated that growth across the 20 countries that share the euro could fall by half a percentage point if the United States imposes a 25% tariff on EU imports and the bloc retaliates, erasing about half the euro zone's expected expansion.
But that estimate has been seen as too optimistic, particularly if a trade war wreaks havoc with investor, business and consumer confidence.
While the ECB expected a trade war to increase inflation by 50 basis points, the turmoil caused by erratic U.S. trade policy could equally detract from it. Nearly all financial indicators impacting prices have shifted dramatically in recent weeks.
The euro has firmed 9% amid the volatility and trades at an all-time high on a trade-weighted basis, energy prices are sharply lower, growth is slowing, and China, the number one target of U.S. tariffs, could dump some of its output on Europe.
A number of investment banks have trimmed their forecasts for euro zone inflation this year, often lowering it to or below the ECB's 2% target.
"Disinflationary forces are piling up," HSBC wrote in a note as it cut its inflation forecast to 1.9% for this year and 1.8% for the next.
Ahead of the meeting investors were seeing at least two more cuts this year with some even pricing a third as growth falters.
LAGARDE CLUES
ECB watchers will sift through Lagarde's comments at a 1245 GMT press conference for clues about future policy.
They will want to see if the ECB maintains a reference to rates being restrictive. Such a phrase would signal that more policy easing remains the baseline.
A possible update on the impact of trade barriers was also in focus as staff were expected to refine its estimates even before new official projections are published in June.
Investors will also want to see if Lagarde offers any signal beyond the usual that ECB decisions are "data-dependent" and will be taken "meeting by meeting".
Finally, Lagarde is likely to be asked if the central bank can estimate the impact of an expected surge in German government spending under the new coalition government, which has promised big defence and infrastructure investments.
Lagarde is likely to deflect these questions, however, as the ECB tends to estimate only the impact of enacted policy rather than proposals.
The spending is nevertheless likely to boost both growth and inflation further out, possibly forcing the ECB to reverse rate cuts.
Unlike the majority of his peers, UBS economist Reinhard Cluse argues that the ECB will need to start hiking borrowing costs next year to prevent this fiscal stimulus from pushing prices up again.
"We believe the ECB might have to hike rates again in late 2026 to prevent an overshooting of inflation in 2027," Cluse said. "We factor in two hikes of 25bps each in September and December 2026, to 2.5%, moderately above neutral."
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