There is little doubt that the European Central Bank’s Governing Council will deliver its eighth rate cut in the current cycle this Thursday. However, the future path remains more uncertain—posing potential volatility risks for the euro.
Key Takeaways:
- ECB expected to cut rates by 25 basis points (bp)
- Lagarde likely to adopt a dovish tone due to tariff risks
- Growth risk outlook remains tilted to the downside
- Inflation forecast for 2025 likely to be revised downward
- Lagarde to reaffirm a data-dependent approach
- We expect a pause in July and deposit rate at 1.75% by year-end
A Fully Priced-In Cut—Focus Shifts to Lagarde’s Message
Markets have already fully priced in a 25 bp rate cut, so the decision itself should have little direct impact on the euro. Attention will instead shift to the tone of the ECB’s communication—especially President Christine Lagarde’s press conference, as investors search for clues about the pace and extent of future monetary easing.
We expect Lagarde to remain non-committal, emphasizing data dependency and the need to assess incoming data—including developments in global trade tensions—before outlining next steps.
U.S. Tariffs Cloud the Outlook
The biggest uncertainty for the ECB is the threat of U.S. tariffs. Despite limited progress in EU–U.S. trade negotiations, Trump’s postponement of 50% tariffs until July 9 has given the EU some breathing room. The Biden administration still appears committed to at least a 10% baseline tariff on the EU.
Trump’s power has been weakened by a recent U.S. court ruling, casting doubt on whether he would even be legally authorized to impose the tariffs if re-elected.
Meanwhile, the eurozone’s economic conditions support further easing. Inflation has dropped below the 2% target, largely due to the 15% decline in Brent crude prices since April 2 and a 3% trade-weighted appreciation of the euro. Wage pressure has also eased significantly: negotiated wage growth fell to 2.4% in Q1, the lowest in three years, down from 4.1% in Q4 2024.
Eurozone Growth Remains Fragile
Despite a solid 0.3% GDP expansion in Q1, much of it was driven by front-loaded exports to the U.S. ahead of potential tariffs. High-frequency indicators have since weakened. The composite PMI dropped below the key 50 threshold in May, reaching 49.5, the first contraction since December. Weak domestic demand is the primary concern—especially in the services sector, which is showing worrying softness.
Inflation Forecast Likely to Be Revised Down
We expect Lagarde to strike a dovish tone during Thursday’s press conference, highlighting progress in disinflation and reiterating that tariff risks tilt the growth outlook to the downside. Given the uncertainty around trade negotiations, no major changes in forward guidance are anticipated. The ECB is likely to retain maximum policy flexibility, deciding on further actions meeting by meeting.
Lagarde may also face questions about reports linking her to the World Economic Forum presidency, though such rumors will likely be denied.
Of particular interest will be the revised macroeconomic projections, which could prove pivotal for the euro. Given easing price pressures post–“Liberation Day,” a significant downward revision of the 2025 inflation forecast seems likely. The ECB might even forecast inflation returning to 2% within 2025, a full year earlier than previously expected.
However, fiscal stimulus in Germany complicates the longer-term inflation outlook, though its effects may not yet be fully incorporated into this round of forecasts.
Not the End of the Road for Cuts
While a 25 bp cut this week is almost certain, the path forward is less clear. Recent statements from Governing Council members, including Chief Economist Philip Lane, suggest a pause in July is likely—especially given that rates may now be close to the long-term neutral level.
The September meeting could bring further action, depending on the data published in the interim. We still expect two additional ECB rate cuts before year-end, bringing the deposit rate to 1.75%.
When?
The ECB’s monetary policy decision will be announced on Thursday, June 5 at 14:15 CET, followed by Lagarde’s press conference at 14:45.
Authors: Matthew Ryan, CFA; Roman Ziruk – Analysts at Ebury
Source: CEO.com.pl – ECB Decision on Thursday: Rate Cut Almost Certain
