ECB REVIEW: ECB cuts and emphasises demand hit in lieu of the global trade war

As expected, the ECB pulled the trigger on another 25bps rate cut, taking the deposit rate to 2.25%; the upper end of the perceived neutral range. Accordingly, policymakers opted to drop the “restrictive” classification on rates. Elsewhere, the statement reiterated the bank’s meeting-by-meeting approach and refusal to commit to a specific policy path. On the trade war, policymakers are of the view that the volatile market response to trade tensions is likely to have a tightening impact on financing conditions. This suggests that a dovish offset could be required from the Bank. In the aftermath of the announcement, source reporting by Reuters revealed that today’s decision was unanimous with some policymakers dropping previous arguments for a pause in the rate-cutting cycle. At the follow-up press conference, President Lagarde highlighted the economic uncertainty presented by the trade war, whilst emphasising the downside risks to inflation, including from the appreciation in the EUR. During the Q&A segment, Lagarde stressed that no argument was made for a 50bps rate cut and they did not discuss providing stimulus. However, the President acknowledged that the GC is viewing the impact of tariffs via the lens of a negative demand shock. Overall, the messaging from the ECB is one of agility when it comes to policymaking but also one of concern for the Eurozone’s growth prospects in lieu of global trade tensions. As such, the ECB has stood out relative to some peers in recent weeks who have taken a more balanced approach and opted to place more emphasis on the upside risks to inflation from tariffs. Post-meeting market pricing has moved in a more dovish direction with 64bps of loosening seen by year-end vs. circa 53bps pre-release.

17 Apr 2025 - 15:04- Fixed IncomeResearch Sheet- Source: Newsquawk