Officials at the European Central Bank are preparing to further reduce interest rates, anticipating a lasting impact on the economy from U.S. tariffs. This decision comes even if the Trump administration softens its stance in the coming weeks. Following intense meetings at the International Monetary Fund this week, most policymakers left Washington disappointed. They predict that Trump’s unpredictable behavior will continue to fuel uncertainty, limiting spending and investment—and ultimately inflation—for some time. The appreciation of the euro, stricter financing conditions due to increased fiscal spending, and falling energy prices will also weigh on prices, strengthening the case for an eighth interest rate cut by a quarter point in June. What happens next will largely depend on updated forecasts for inflation next year and beyond. Economists from Bank of America, Deutsche Bank, and Morgan Stanley see deposit rates—currently at 2.25%—falling to at least 1.5% this year to boost demand. While members of the Governing Council, including Olli Rehn and Gediminas Simkus, have indicated openness to lowering borrowing costs, others like Klaas Knot and Martins Kazaks warn against excessive activism, arguing that the medium-term impact of recent events remains unclear. ECB President Christine Lagarde largely stuck to the official line of the ECB. ‘When the size and distribution of shocks are highly uncertain, we cannot provide certainty by committing to a specific interest rate path,’ she told finance ministers and fellow central bankers on Friday (April 25, 2025). Earlier in the week, she stated that the ECB must be ‘data-dependent.’ Most recent reports suggest weaker growth dynamics ahead. A survey of market directors revealed depressing confidence and sluggish demand, while IMF forecasts published on Tuesday (April 22, 2025) downgraded economic expansion for the 20 countries to just 0.8% this year from 1% previously. Slower growth is accompanied by lower inflation. The IMF, like the ECB, predicts price pressures will reach 2% sometime in the second half of the year. However, compared to some policymakers visiting Washington from Europe, the message is more cautious. Achieving the 2% target ‘may require another 25 basis point cut,’ Alfred Kammer, director of the IMF’s European department, told reporters on Friday. ‘We don’t see the need to go below 2%’ absent ‘significant shocks.’ This threshold is considered by economists to be the closest estimate of neutral, neither stimulating nor constraining demand. It could become a critical point where policymakers, especially the more cautious ones, may be unwilling to cross. ‘If inflation falls significantly below target for an extended period, the natural choice would be to lower interest rates into stimulus territory,’ said Kazaks, head of Latvia’s central bank, in an interview Saturday (April 26, 2025). ‘That is not the case currently.’ His Dutch counterpart, Klaas Knot, argued in a speech Thursday (April 23, 2025) that neutrality ‘remains broadly where it should be.’ While inflation may slow faster than expected, he noted that the long-term effects of trade disruptions and higher European defense and infrastructure spending are ‘much less clear.’ His comments suggest that on June 5—the last meeting he participates in before his term ends—the ECB will have to lower projections for consumer price increases next year from the 1.9% forecast in March. But it’s the 2027 measure that will matter to assess whether prices will stabilize subsequently. Despite uncertainty, some colleagues are nearly ready to declare victory. The Frenchman Francois Villeroy de Galhau supported that ‘there is no current inflation risk in Europe.’ His Slovak counterpart Peter Kazimir agreed that inflation will approach its target in the coming months—earlier than the early 2026 prediction made just last month.
ECB Prepares for June Interest Rate Cut Amid Trade Uncertainty
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