ECB’s Seventh Rate Cut Signals Deeper Easing Amid Trade Uncertainty

Barchart·04/17/2025 21:58:06

The European Central Bank lowered its deposit rate by a quarter-point to 2.25%, marking the seventh cut since last June as trade tensions threaten to derail the euro-area recovery. President Christine Lagarde removed the term “restrictive” from the policy statement and warned that heightened US tariff risks have increased downside threats to growth, prompting markets to ramp up bets on further easing. Lagarde cautioned that the escalation in global trade uncertainties will likely dampen exports, drag down investment and consumption, and tighten financing conditions amid deteriorating financial-market sentiment. German 10‑year bond yields eased to around 2.5%, and the euro slid as much as 0.6% to $1.336, while traders priced in three more rate cuts before year‑end. Market Overview:

• ECB cuts deposit rate to 2.25%, dropping “restrictive” language amid tariff headwinds.
• German bond yields fall and the euro weakens as policymakers signal further easing.
• Markets anticipate three additional rate reductions by the ECB this year.

Key Points:

• Lagarde highlights trade tensions as a growing risk to euro-area growth.
• Inflation has eased toward the ECB’s 2% target, aided by lower energy costs.
• Officials deem the concept of a “neutral” rate obsolete under current uncertainty.

Looking Ahead:

• Economists expect another cut at the June meeting, targeting a terminal rate near 1.5%.
• Ongoing US tariff measures could further suppress euro-area exports and inflation.
• Policymakers emphasize data dependency and agility in navigating evolving risks.

Bull Case:

• The ECB’s swift and proactive rate cuts demonstrate a strong commitment to supporting euro-area growth and financial stability, helping to mitigate the impact of global trade headwinds.
• Lower borrowing costs may stimulate investment, consumption, and credit demand across the eurozone, cushioning the economy against external shocks and tariff-induced slowdowns.
• The removal of “restrictive” language signals a more accommodative stance, which should boost market confidence and provide additional support for risk assets, especially in export-sensitive sectors.
• Falling inflation and energy prices create room for more aggressive monetary easing, potentially lowering the risk of deflation and underpinning a gradual recovery in euro-area demand.
• If the ECB remains agile and data-driven, it could outpace global peers in responding to evolving risks, helping the euro-area maintain competitiveness and stability in turbulent markets.

Bear Case:

• Seven consecutive rate cuts in less than a year may signal desperation, eroding investor confidence in the ECB’s ability to manage persistent downside risks and reviving fears of secular stagnation.
• Prolonged ultra-low rates could pressure European banks’ profitability, constraining lending capacity and potentially worsening credit conditions for businesses and households.
• The continued weakening of the euro may unsettle global currency markets, increase import costs, and fuel volatility, undermining consumer confidence and corporate planning.
• Lagarde’s warning about trade headwinds highlights deep structural vulnerabilities in the euro-area economy that cannot be addressed by monetary policy alone.
• With markets now pricing in further aggressive easing, the ECB risks exhausting its policy toolkit with diminishing returns, especially if trade tensions and external shocks remain unresolved throughout 2025.

Having contemplated a pause just weeks ago, the ECB pivoted toward deeper easing as inflation retreated to 2.2% year-on-year and confidence indicators plunged. Lagarde stressed that falling energy prices and a stronger euro require vigilance to prevent disinflation from morphing into outright deflation, especially if trade reroutes supply chains. Looking forward, major banks—including Goldman Sachs, Deutsche Bank and Bank of America—forecast deeper cuts to counter persistent downside risks. With US policymakers grappling with their own tariff‑induced uncertainties, the euro-area recovery hinges on the ECB’s ability to remain data-driven and responsive to rapidly shifting global conditions.

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