Lagarde hints at April pause amid threat of trade war

European Central Bank (ECB) president Christine Lagarde hinted that the bank may pause the current cycle of interest rate cuts next month as the looming threat of a trade war with the US and big changes to German and European Commission fiscal rules cloud the economic outlook.

Frankfurt lowered borrowing costs by further quarter point (0.25 of a percentage point) on Thursday, reducing its main deposit rate to 2.5 per cent, a move that had been flagged in advance.

It was the ECB’s sixth rate cut since last July but market commentators suggested it may be the last easy decision, given the uncertainty now coursing through the global economy.

Ms Lagarde said policymakers would not commit to any particular path for borrowing costs since the backdrop was changing “dramatically” from one day to the next.

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“We will all have to be extremely vigilant, we will have to be agile, to respond to the data,” she told reporters in Frankfurt.

“If the data indicate that the most appropriate monetary-policy stance is a cut, it will be a cut. If, on the other hand, the data indicate that the most appropriate decision is not to cut, then it will be a pause,” she said.

The ECB has, in recent days, come under pressure to prevent a steep rise in euro zone government borrowing costs after the German chancellor-in-waiting, Friedrich Merz, said his country would “do whatever it takes” to rearm.

And while price pressures across the euro zone eased in February to 2.4 per cent, increases in energy prices in response to the uncertainty surrounding “peace talks” to end the Russian invasion of Ukraine pose a risk to the ECB’s inflation projections, which now suggest inflation across the bloc as a whole will not hit the bank’s 2 per cent target until the first quarter of 2026.

The imminent threat of a trade war with the US also complicates matters.

“We could have potentially one more cut, a maximum of two,” said Aviva Investors senior economist Vasileios Gkionakis, noting the ECB’s change in language – it said “monetary policy is becoming meaningfully less restrictive” – was a win for the policy hawks and meant to signal that an end to rate cuts is coming.

Following the ECB’s meeting, traders further curbed their bets on an April rate cut, with the market now seeing less than a 50 per cent chance of a quarter point move, down from over 60 per cent last week.

Policymakers also see a growing chance of an April pause before they lower rates again, once there is greater clarity about trade and fiscal policy, sources told Reuters.

“The ECB finds itself in a challenging position between the threat of US tariffs in the near-term that could warrant further policy rate cuts – and a move into stimulative territory – and the growing commitment to higher defence spending over the next several years which will be required to secure Europe’s strategic autonomy,” Mark Wall, chief European economist at Deutsche Bank, said.

“This environment requires a deft hand on the monetary policy lever and the preservation of policy optionality,” he said. – Additional reporting, Reuters