ECB makes sixth successive rate cut – expect more to come

The European Central Bank (ECB) has cut its policy rate for the sixth time in succession as it responds to deteriorating growth prospects for the Euro area.

The ECB last week announced cuts across its three target interest rates, with its main refinancing operations, marginal lending facility, and deposit facility each taking a 25-basis point trim, reduced to 2.40%, 2.65% and 2.25%, respectively.

The pre-Easter break policy rate decision is the seventh cut this cycle, and marks the ECB’s sixth straight reduction since June 2024.

The Central Bank in its decision cited increased economic uncertainty, which it says has “reduced confidence among households and firms”, while trade tensions have had a “tightening impact on financing conditions”.

“These factors may further weigh on the economic outlook for the euro area,” it said.

Despite noting some positives, with the disinflation process “well on track”, wage growth moderating, and the euro area economy “building up some resilience against global shocks”, the decision to cut rates was not unexpected, according to Principal Asset Management market strategist Christian Floro.

“Today’s decision to cut rates was expected given the swiftly deteriorating growth outlook amid rising trade tensions, which has now overridden much of the potential positive near-term growth factors, including a strengthening labour market and a stabilising business confidence,” wrote Floro in a recent analysis.

He noted that while greater European defence spending and Germany’s considerable fiscal infusion should lift Euro area economic growth next year, the economic backdrop “remains mired in uncertainty”.

Trade uncertainty trumps economic revival hopes

While noting the Eurozone’s efforts to build up its resilience against global shocks, particularly the fiscal expansion of its key economies, Floro said downside risks stemming from trade policy have stymied many of its growth prospects.

The Eurozone’s economic outlook is “clouded with exceptional uncertainty”, he wrote, triggered by the Trump Administration’s bellicose trade policies.

Trump’s ‘Liberation Day’ tariffs, announced on 2 April, imposed a 20% impost on goods exported from the EU.

“This will likely inflict a meaningful demand shock to the euro area, and with inflation already more subdued of late its path will likely fall below target within the forecast horizon. Meanwhile, the appreciation of the euro and lower energy prices have added downside risks to inflation.”

This, Floro said, has forced the ECB to adopt a “more data dependent, agile approach” to its policy decisions, “keeping its options open as it assesses the combined impact of higher US tariffs and higher fiscal spending in Europe”.

Floro predicts that with inflation now close to target, combined with the adverse impacts of increased trade uncertainty on market conditions and both firm and household confidence, further rate cuts will be necessary this year.

“Our expectation calls for 25 basis point cuts in June, July and September, bringing policy rates to 1.5% by the end of the year,” Floro concluded.