ECB to cut rates at next four successive meetings

Overall, at the next four meetings, we expect 100bp of rate reductions, taking the ECB’s deposit rate to a low of 1.5%. The risks to this view are skewed towards more rate cuts.

Up until recently, the ECB has been agnostic on whether the tariff shock would be inflationary or disinflationary, saying that there are drivers in both directions. However, there seems to have been some shift in their thinking recently, with generally a more dovish tone and officials showing more concern about economic growth.

This makes perfect sense as developments have been almost exclusively disinflationary. To start with economic growth, the outlook has deteriorated sharply since the ECB published its March projections. Second, the euro has strengthened materially, and generally financial conditions have tightened. Third, oil and commodity prices have fallen sharply. This reflects the deterioration in the global economic outlook generally and the fact that China – a major source of demand for commodities – is being hit with the highest tariffs. Indeed, it is important to note that tariffs could make excess capacity in China’s industrial sector worse, which would put downward pressure on global manufactured goods prices. Finally, the EU has not (yet) responded with retaliatory tariffs on US imports, which could have been an upward pressure on inflation. However, we calculate that even if it were to match US tariffs, the direct upward impact on inflation would likely be moderate.

Looking ahead, fiscal stimulus in the eurozone fuels the prospects of a growth recovery in 2026 (and the years beyond). Given that fiscal policy will do a bit more of the heavy lifting than monetary policy, we have recently upgraded our views on the terminal rate to 1.5% compared to 1% before.

Overall, we maintain our long running view that while tariffs will be inflationary for the US, they will be disinflationary for the eurozone. Indeed, we think eurozone inflation will start to undershoot the ECB’s goal from around the middle of this year. Given the ECB’s projections in March were already consistent with the deposit rate being reduced to around 2%, it makes sense, given the change in the outlook, to think that we are heading below that level, and quite possibly quite significantly below.