The European Central Bank is expected to cut interest rates for the seventh time in a year on Thursday, looking to prop up an already struggling economy that will take a large hit from U.S. tariffs.
The ECB has been easing borrowing costs rapidly as undue price pressures are disappearing, and recent turmoil on global markets is likely to bolster the bank’s conviction that euro zone inflation is under control, adding to the case for further policy easing.
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 that 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.
“Even with the U.S. tariff pause, the arguments now clearly favour a cut,” Deutsche Bank said in a note. “The hit to growth from reciprocal tariffs, uncertainty and financial conditions likely exceeds what the ECB was expecting.”
The ECB earlier estimated that growth across the 20 countries that share the euro currency could fall by a half a percentage point if tariffs are imposed, erasing about half the bloc’s expected expansion. That estimate could still prove too optimistic if Trump reverts to bigger trader barriers or if the European Union retaliates.
The turmoil caused by erratic U.S. trade policy could also weigh on prices and help the ECB get inflation back to target quicker.
The euro has firmed amid the volatility, energy prices are sharply lower, growth is likely to slow on weaker trade and China, the number one target of U.S. tariffs, could dump some of its output on Europe.
Morgan Stanley argues that based on prevailing market prices and exchange rates, inflation could even fall below the ECB’s 2% target soon.
“The revised assumptions push headline meaningfully down, below 2.0% from the second quarter onwards,” it said. “And euro area inflation would potentially be below target for most of 2026.”
A final argument for a rate cut of 25 basis points, taking the deposit rate to 2.25%, is that investors have fully priced in a move and the ECB will not want to upset already jittery markets.
LAGARDE CLUES
While the decision is largely seen as a done deal, investors 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.
They are also looking for a possible update on the impact of trade barriers. While Lagarde offered some numbers late last month, ECB staff was working to refine estimates and she may choose to share more, even though new official projections are not due until June.
Investors will also want to see if she 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.
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.”
(Editing by Catherine Evans)
