The European Central Bank cut interest rates as expected on Thursday and kept all options on the agenda for its next meeting, even as pressure grows for a summer pause in its annual easing cycle.
Since June last year, the ECB has cut borrowing costs eight times, or by 2 percentage points, in an effort to support the eurozone economy, which was already struggling before unpredictable US economic and trade policies dealt it new blows.
With inflation now firmly in line with the 2% target and rate cuts already in sight, attention has turned to the ECB's message on the path ahead, especially given that rates at 2% are now in a “neutral” range where they neither stimulate nor slow growth.
But the eurozone's 20-nation central bank gave few hints in its statement, sticking to its mantra that decisions will be made at each meeting and based on incoming data.
“The Governing Council makes no ex-ante commitment to a specific rate path,” the ECB said. “Decisions on interest rates will be based on its assessment of the inflation outlook in the light of incoming economic and financial data, the development of core inflation and the strength of monetary policy transmission.”
ECB President Christine Lagarde's press conference at 12:45 GMT could provide more insight into the months ahead, as the bank's most aggressive monetary easing cycle since the 2008/09 global financial crisis is expected to begin to come to an end.
Investors are already pricing in a pause in July, and some conservative policymakers are arguing for a break to give the ECB a chance to reconsider how exceptional uncertainty and political turmoil both at home and abroad will change the outlook.
While ECB board member and leading hardliner Isabel Schnabel has openly called for a pause, others have been more cautious, and Lagarde is likely to stick to language that leaves the ECB's options open as the outlook is subject to sudden changes.
The argument for a pause is based on the premise that the currency bloc's short- and medium-term prospects differ significantly and may require different policy responses.
Inflation may decline in the short term – perhaps even below the ECB's target – but increased government spending and higher trade barriers could add to price pressures going forward.
An added complication is that monetary policy has a 12-18 month lag in its impact on the economy, so support approved now could be helping a bloc that no longer needs it.
But investors still expect at least one more rate cut this year and a small chance of another move in the future, especially if U.S. President Donald Trump's trade war intensifies.
Acknowledging short-term weakness, the ECB has cut its inflation forecast for next year.
Trump's tariffs are already hurting economic activity and will have long-term consequences even if a peaceful solution is found, given the hit to confidence and investment.
“A further escalation of trade tensions in the coming months would push growth and inflation below our baseline projections,” the ECB said. “In contrast, if trade tensions were resolved favourably, growth and, to a lesser extent, inflation would be higher than our baseline projections.”
This sluggish growth, along with lower energy costs and a strong euro, will contain price pressures.
Indeed, most economists believe inflation could fall below the ECB's 2% target next year, evoking memories of the pre-pandemic decade when price growth consistently fell below 2%, even if forecasts show it returning to target in 2027.
In the future, the prospects will change significantly.
The European Union is likely to retaliate if the US imposes permanent tariffs, which would increase the cost of international trade.
Meanwhile, companies could relocate some of their operations to avoid trade barriers, but changes in corporate value chains are also likely to raise costs.
Higher defence spending in Europe, particularly in Germany, and the cost of moving to a green economy could push up inflation, while a shrinking workforce due to an ageing population will keep wages under pressure.
Sourse: breakingnews.ie
