The European Central Bank (ECB) is widely expected to cut its key interest rate by 25 basis points on Thursday, marking a sixth consecutive reduction amid softening inflation and escalating trade risks triggered by the United States.
The deposit rate is set to fall to 2.25%, its lowest level since January 2023, as the ECB seeks to insulate the eurozone economy from the economic fallout of new US tariffs and rising global uncertainty.
Inflation pressures cool, giving ECB breathing room
Final readings from Eurostat on Wednesday showed that headline inflation in the eurozone eased to 2.2% year-on-year in March, down from 2.6% the previous month. Core inflation, which strips out volatile components such as energy and food, fell to 2.4%, the lowest reading since January 2022.
“We expect the ECB to cut policy rates by 25bp, fully priced, with dovish communication on the outlook, cracking the door open to rates below neutral,” said Bank of America economist Ruben Segura Cayuela. “However, we think the reference to ‘meaningfully less restrictive’ rates will probably go, and we could even hear that a pause was discussed.”
Goldman Sachs’ Sven Jari Stehn echoed a similar tone: “We look for President Lagarde to signal more concern around growth due to the trade tensions but remain non-committal on future policy steps.”
Stehn also suggested that the euro’s appreciation—nearly 10% against the US dollar since early March, marking the strongest two-month rally since 2010—alongside a measured EU response, may alleviate some of the inflationary pressure caused by US tariffs.
ABN Amro forecasts the ECB will continue cutting rates until the deposit facility reaches 1.5% in September, arguing that tariffs are weighing on both growth and inflation.
Deutsche Bank analysts agree that further rate reductions are justified: “Even with the US tariff pause, the arguments now clearly favour a cut. The hit to growth from reciprocal tariffs, uncertainty and financial conditions likely exceeds what the ECB was expecting.”
Trade tensions loom large over eurozone outlook
On 2 April, US President Donald Trump imposed a 20% “reciprocal tariff” on EU imports, only to pause the measure a week later for 90 days in pursuit of bilateral trade deals. However, a blanket 10% tariff on non-Chinese imports remains in place, affecting around €380 billion ($431 billion) worth of European goods.
The EU had proposed the removal of all industrial tariffs, including those on cars, but Washington rebuffed the offer.
Amid the uncertain trade backdrop, business sentiment across the eurozone has deteriorated.
Germany’s ZEW economic sentiment index fell to its lowest level in nearly two years, while the broader eurozone gauge returned to levels last seen in late 2022.
“The erratic changes in the US trade policy are weighing heavily on expectations in Germany, which have sharply declined,” said ZEW President Achim Wambach, PhD. “It is not only the consequences the announced reciprocal tariffs may have on global trade, but also the dynamics of their changes, that have massively increased global uncertainty.”
Uncertainty remains high on the political front. On Tuesday, EU Trade Commissioner Maros Sefcovic reported little progress following talks with US officials, while Spanish Finance Minister Carlos Cuerpo claimed that US Treasury Secretary Bessent was keen to reach a deal.
Italian Prime Minister Giorgia Meloni is set to meet with President Trump at the White House on Wednesday, with trade and defence topping the agenda.
