Why the ECB should not hesitate to cut rates this week
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Article Type
Insights
Topic
Macro
Published
April 15, 2025
Read time
5 mins
Author
Irina Kurochkina, CFA
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Market turbulence is expected to persist as tariffs remain subject to changes and ongoing negotiations before taking their final shape. Given the rapidly deteriorating global economic outlook and weakening business confidence in Europe, the ECB has strong grounds to cut its policy rate at the next meeting.

 

We expect the ECB to adopt a more accommodative stance after being somewhat reserved in the previous policy meeting in March. Just weeks ago, the Governing Council faced market concerns about Europe’s “fiscal bazooka”, prompted by rising defense budgets and a shift in Germany’s traditionally conservative fiscal stance. Since then, the focus shifted to an escalating trade war that is unfolding in an unprecedented manner on a global scale. Although market expectations for the ECB’s rate path have fluctuated in recent days, we believe the ECB has enough reasons to cut rates at their meeting on April 17:

 

  • Material negative impact on economic outlook is already unfolding. The ECB does not need to wait for updated GDP forecasts to observe the deterioration in economic activities. The tariffs announced by the US administration were significantly more aggressive than expected, catching markets off guard. Although some measures were later rolled back or delayed, the uncertainty has already taken a toll on investor and corporate sentiment. This drop in confidence has led to postponed investment and reduced spending, which dampen economic activity and threaten to further slow GDP growth. Therefore, even if the final tariffs are softer than currently outlined, or if the EU reaches a deal to avoid punitive measures, the damage from uncertainty has already been done. The unpredictable communication style of the US administration suggests this uncertainty will linger, casting a prolonged shadow over Europe’s economic outlook.
  • Euro appreciation could add to export slowdown. In the current macroeconomic environment, the ECB is likely to prefer a weaker euro. While currency steering is not part of the ECB’s mandate – and they consistently emphasize this in their communication – exchange rates remain one of the important inputs in policy considerations. Recent unusual moves in the FX market highlighted increased demand for the euro, driving its appreciation against other major currencies. The US dollar, typically seen as a safe-haven asset, has been underperforming amid a mix of concerns ranging from challenged reserve status to the long-term sustainability of the US fiscal policy. As a result, the euro has re-emerged as a preferred safe-haven currency. While this shift reduces inflation risks, it poses challenges for Europe’s export-driven economies, particularly Germany. With tariffs potentially raising the cost of European goods abroad, a stronger euro could make exports even less competitive, further weakening industrial output.
  • Forward guidance is essential in uncertain times. In heightened volatility, clear and proactive forward guidance is critical. While some ECB members seem to prefer to hold off rate cuts to preserve flexibility, we believe that hesitation could undermine business confidence and deepen the slowdown.  Delayed monetary action risks further deferring investment decisions and weakening labour market dynamics. In the current environment of increased market volatility, a lack of accommodative sentiment from the central bank could send a wrong signal, potentially pushing European rates higher. This would be counterproductive at a time when corporate and sovereign borrowers are already facing growing financing pressures.

 

What if?

Investors have noted the lack of full consensus within the Governing Council regarding the next rate cut. One of the expressed concerns is the risk that tariffs could trigger an uptick in inflation, potentially making the ECB regret the premature easing. While it is a valid consideration, we believe the ECB needs to look at cards at hand and respond to the signals already materializing in the economic outlook.

 

Inflation is currently on a downward trajectory, and several factors suggest this trend is likely to continue. Energy prices have been steadily declining in recent months, and wage growth in Europe has slowed down. The immediate impact of newly announced tariffs has led companies to delay investment decisions, increasing the risk to the labor market resilience. Any reduction in consumer confidence is likely to lead to more cautious spending, reducing companies’ ability to pass on potential price increases.

 

An additional risk is an increased import from other regions – particularly China – that could exert further downward pressure on prices, especially in sectors like electronics and automobiles. In this context, even amid heightened uncertainty and volatility, the balance of risks justifies a proactive approach. The ECB should not hesitate to cut rates this week to preserve financial stability in the pursuit of its official mandate.

Important Information

Author

Irina Kurochkina, CFA
Portfolio Manager

Irina Kurochkina, CFA, is a portfolio manager in the fixed income, LDI and investment solutions team with a focus on sovereigns.

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