After the last European Central Bank interest rate cut in March there was an expectation that there would be no further move at this week’s meeting. But the world has changed in the interim, notably with the announcement by Donald Trump of wide-scale tariffs on imports from the EU.
Even though some of these have been postponed and some sectors remain exempted, the general 10 per cent tariff that remains in place is unprecedented in recent years and the threat of higher tariffs remain.
This is a hit to growth prospects in the euro zone – and the increase in the value of the euro, notably against the dollar, will help push down on inflation further. All this means that a cut in ECB interest rates on Thursday now looks a nailed on certainty and most market analysts expect that this will be of a quarter point, bringing the key ECB deposit rate to 2.25 per cent.
There will be more interest, however, in what the ECB says about where rates now are and what the outlook is.
A rate of 2.25 per cent is getting down towards what might be judged a neutral level, in other words one which neither adds to or subtracts from demand.
There is no magic formula here but the ECB may have to concede that borrowing costs are no longer restrictive. And, of even greater interest will be how it couches the outlook. With tariff uncertainty remaining – and possibly worsening again in time – and the euro on the rise, will the ECB be prepared to point to the likelihood of further reductions into the territory where interest rates are so low that they may be judged to add to demand and thus inflationary pressures?
Or will ECB president Christine Lagarde just kick to touch and say that further moves will depend on “the data” – in other words on what happens next?
Either way the outlook for borrowers look pretty good, while savers have been trying to grab the last of the decent offers before they disappear off the table.
