The European Central Bank(ECB) is widely expected to cut rates by 25 bps at the conclusion of its policy meeting on Thursday. This would put it among the most easy of the major central banks, renewing downward pressure on the Euro. But, the heightened global uncertainty means that what comes next could be left in doubt. And that could shake up the market more than the rate cut itself.
Economists are largely agreed on the ECB’s need to ease. This is based on lackluster economic performance and the expectation that inflation will quickly come back to target in the coming months. On top of that, the threat of tariffs being applied by the US makes it even more important for the European Central Bank to take a defensive stance for the economy. Economists are actually fretting that the European Central Bank(ECB) has waited too long and might “undershoot” the target.
A Surprising Amount of Agreement
Futures markets agree with the economists’ views, almost entirely pricing in a rate cut for the coming meeting. What’s more, and more surprising, is there seems to be a pretty solid consensus among ECB members. Typically they break up into two camps ahead of a meeting, expressing dissonant views about whether focusing on price stability is more important than economic growth.
But, this time, even the most hawkish (including Austria’s Robert Holzmann) have admitted that rates need to go down. The bank’s Chief Economist, Philip Lane, admitted to the potential for further easing. Though he naturally couched the projection amidst typical rhetoric of needing to balance support for the economy and prices. But the fact that (the lack of) economic growth is being factored into the decision suggests an inclination for easing.
The Market Reaction
Despite the general agreement, the market might not go through the meeting peacefully. That’s because a lot rests on what comes next, with traders expected to comb through the policy statement and particularly ECB President Christine Lagarde’s comments for clues about the next meeting. And the way things are, it seems someone is almost definitely going to end up being disappointed, which could jolt around the Euro.
Economists are predicting back-to-back rate cuts, extending past this meeting to the next. The market is mostly pricing in that scenario. But, that doesn’t mean the European Central Bank(ECB) will be unambiguous in communicating that outlook, which leaves room for moves in the currency. Signals that there might be a pause in the easing cycle would support the Euro. But signals that the shears will keep being applied to interest rates could push the currency towards parity with the dollar.
The Complicating Situation
Trump is the major factor here, as tariffs being applied by the US on European exports will have an important impact on the economy and prices. Even tariffs not applied directly to the EU, such as on metals, might still have a knock-on effect if they raise global prices for the commodities.
The view of the need for more easing among economists was largely based on the expectation for tariffs. But Trump hasn’t implemented them just yet. The size, scope and means of application will all have important economic considerations. Therefore the ECB might be in a “wait-and-see” position, holding off responding to tariffs until they are actually applied. Which means the Statement, and Lagarde’s comments, might be particularly vague about what’s coming next, giving the market room for some extra volatility.
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