[FRANKFURT] The European Central Bank (ECB) is expected to deliver its seventh-straight interest rate cut this week as US President Donald Trump’s volatile trade policies add to headwinds for the sluggish eurozone.
Even before Trump unleashed his on-off tariff onslaught on the world, the ECB had been bringing borrowing costs down as inflation eased.
Worries about sluggish performance in the 20 countries that use the euro have increasingly overshadowed inflation concerns as higher rates have pinched businesses and households.
Trump’s tariffs have added to the sense of urgency. Europe is in the president’s crosshairs over its hefty surplus in traded goods with the United States, stoking fears about a heavy hit to the continent’s exporters.
Predicting a cut when the ECB’s governing council meets on Thursday (Jun 5), HSBC said the eurozone’s “near-term outlook has deteriorated on the recent US tariffs announcements and related uncertainty”.
Analysts expect another quarter-point reduction that would take the Frankfurt-based institution’s key deposit rate to 2 per cent.
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But observers believe the June cut could be the final one in the current streak, with the ECB likely to pause at its next meeting in July to take stock of the latest economic developments.
The ECB’s series of cuts stands in contrast to the US Federal Reserve, which has kept rates on hold recently amid fears that Trump’s levies could stoke inflation.
Global order ‘fracturing’
Trump has already hit the EU with multiple waves of tariffs – it currently faces a 10 per cent “baseline” levy as well as 25 per cent duties on cars, steel and aluminium.
He has paused even higher rates on the EU and other trading partners to allow for talks, momentarily easing some of the tensions that had roiled global markets.
But in a sign the trade war may be far from over, he threatened last month to swiftly impose a 50 per cent tariff on the EU – only to delay the move a few days later to Jul 9.
Highlighting the alarm felt in Europe, ECB president Christine Lagarde said last week that the global economic order backed by US leadership was “fracturing”.
“Multilateral cooperation is being replaced by zero-sum thinking and bilateral power plays,” she said in a speech in Berlin.
But the ECB faces a tricky task in protecting the eurozone from the mercurial US president’s trade policies while keeping inflation stable.
Euro-area inflation was 2.2 per cent in April, slightly above the ECB’s 2 per cent target and higher than expected.
May’s inflation estimate will be published by Eurostat on Tuesday ahead of the ECB meeting.
But most recent signs suggest price pressures are easing faster than previously thought, and the ECB is expected to cut its inflation predictions when it releases its own new economic forecasts on Thursday.
Downward pressure
Most analysts expect Trump’s tariffs to add to downward pressure on eurozone inflation, particularly as it might lead China – facing the highest US levies – to redirect inexpensive manufactured goods to Europe.
The ECB is expected to cut its growth estimates on Thursday due to the impact of the trade war, after the EU slashed its forecasts last month.
While investors will be on the lookout for any clues from Lagarde about the ECB’s next move, analysts warn that heightened uncertainty means she will give little away.
The meeting will likely also produce questions over the future next moves for Lagarde.
The former head of the World Economic Forum Klaus Schwab told The Financial Times last week that he had spoken with Lagarde about her taking over as head of the organisation.
The ECB brushed away the rumours, saying Lagarde was “determined” to see out her term at the helm of the central bank. AFP
