"The ECB remained cautious in its statement, opting to keep its options open, amid the ongoing trade uncertainty. However, the ECB highlighted that the outlook has deteriorated, signalling that it will likely continue easing rates in upcoming meetings. With the net impact of tariffs likely to be deflationary, this could allow the ECB to cut rates below the lower range of its neutral rate estimate if needed.
“A more accommodative monetary policy would also help lower borrowing costs for governments in the Eurozone, as they look to boost defence spending. The ECB may go as far as cutting rates three more times this year, taking the key deposit rate down to 1.5% by the end of 2025.
“The recent shifts in global trade policy present a significant downside risk for both the growth and inflation outlook in the Eurozone. Commodity prices have weakened significantly in recent weeks and the fall has been accompanied by a sharp appreciation in the Euro. We expect this to put downward pressure on near term inflation. Additionally, the outfall of the trade disruptions could create a global glut of manufactured goods, which could see goods prices fall into deflationary territory this year. This raises the risk of inflation undershooting the ECB’s target in the medium term and was likely a key factor underpinning today’s decision to cut interest rates alongside a weaker economic backdrop.
"Despite the temporary pause in the higher rate of reciprocal tariffs and any implementation of retaliatory measures, the induced uncertainty will significantly weaken business activity in the near term. We estimate that Ireland, Germany, and the Netherlands will be the most adversely affected economies in the Eurozone from the tariffs, given their exposure to the US economy.”
