Crédit Mutuel AM: A pragmatic ECB
Like markets, we expect that the European central bank (ECB) will proceed with an additional interest rate cut of 25 basis points (bps) following the meeting of the Governing Council on April 16 and 17.
This decision will be motivated by widespread concerns among ECB members regarding growth, particularly after the aggressive tariff hikes (an additional 20 % for the European Union) announced by Donald Trump on April 2 and which have been partially suspended for 90 days (except for China), However, the ECB’s decision should reflect diverging opinions between doves and hawks regarding inflationary risks.
Below are our expectations:
- The Governing Council of the ECB will reduce the deposit rate again by 25 basis points to 2.25%, a zone where European monetary policy could no longer be considered restrictive.
- During the press conference, due to increased economic uncertainty, ECB President Christine Lagarde will likely keep all options open in order to adjust future monetary policy decisions, on a meeting-by-meeting basis and depending on available data, economic projections and risk assessments that have significantly shifted since Wednesday, April 2. "Liberation day", as it was referred to by Donald Trump, revived concerns of prolonged economic slowdown in the European Union that could weigh heavily on prices despite potential countermeasures.
- However, the ECB will still consider inflation risks as symmetric.
- Although interest rates are the primary monetary policy tool, Christine Lagarde will remind us that the ECB has "non-conventional" instruments at its disposal in case of financial stress (targeted longer-term refinancing operations - TLTRO, transmission protection instrument - TPI, etc.).
In summary, the ECB is likely to continue with the gradual reduction of its key interest rates (-25 bps) in April, because disinflation is on track and largely consistent with the institution's forecasts. Unless there is a change in communication from the European Central Bank, market reaction following the meeting should be limited.
