ECB set to cut rates again in April

On 17 April, the ECB should announce a further interest rate cut of 0.25%. The deposit facility rate (DFR) will be cut to 2.25%, making eurozone monetary policy increasingly less restrictive. However, the outlook for the eurozone economy and monetary policy has suddenly become more challenging given the increased uncertainty in US trade policy following the recent tariff announcements (see Chart 1).

The US imposition of high tariffs on most of its imports is expected to reduce international trade flows. The eurozone economy is sensitive to international trade: in 2024, total goods exports accounted for more than 18% of GDP. The US is the eurozone’s largest market and absorbed exports equal to 3.5% of its GDP. Unsurprisingly, several members of the ECB Governing Council have highlighted increased downside risks to eurozone growth and that inflation could fall below the 2% target.¹

Downside risks to growth and inflation also stem from the appreciation of the euro. Compared to the values used in the latest ECB’s macroeconomic projections, the euro trade-weighted exchange rate has risen by more than 6% (see Chart 2).

Some support to growth will come from lower energy bills as oil and natural gas prices have fallen since the beginning of 2025. However, this will push inflation further down (see Chart 3).

These shocks are hitting the eurozone economy at a time when inflation has eased to just above the 2% target. In March, headline inflation stood at 2.2% year-on-year (YoY) and core inflation was 2.4% YoY, the lowest value since October 2021.

Add the slowdown in wages and services prices that have emerged since the second half of 2024, and the elements most relevant to the Governing Council point to a high probability that the DFR could be reduced to, if not below, 1.5% by the end of 2025.

However, this picture could change rapidly. If, for example, the US administration were to backtrack further on the announced tariffs, the drag on growth and inflation would be less severe than currently anticipated. The eurozone economy could also benefit from announced infrastructure and defence spending in Germany if it were deployed fast. It therefore seems appropriate that the ECB maintains a data-dependent, meeting-by-meeting approach to policy.

¹See https://www.reuters.com/markets/europe/ecb-braces-bigger-than-anticipated-growth-hit-tariffs-sources-2025-04-09/

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