ECB to cut rates again as the case builds for a summer pause
"Our central view is that today's cut is likely the last for some time," HSBC said in a note.
Lagarde also said the euro zone appeared to be attracting more foreign investment, a sign of growing investor confidence and part of the reason why the euro has firmed so much since the U.S. administration embarked on its global trade war.
But there is exceptional uncertainty in the outlook.
Falling energy prices and a stronger euro could put further downward pressure on inflation, said Lagarde, adding that effect could be reinforced if higher tariffs led to lower demand for euro exports and re-routing of overcapacity to Europe.
Depending on the outcome of the trade war with the United States, inflation and growth could significantly differ from projections, the ECB said, as it took the unusual step of releasing alternative scenarios to its forecasts.
PAUSE CASE
The case for a pause rests on the premise that the short- and medium-term prospects for the currency bloc differ greatly and may require different policy responses.
Inflation is set to dip in the short term and undershoot the ECB's target next year, but increased government spending and higher trade barriers will add to price pressures later.
The added complication is that monetary policy impacts the economy with a 12-to-18 month lag, so support approved now could be giving help to a bloc that no longer needs it.
"In our baseline, we expect the ECB to pause at the July meeting and deliver a final rate cut in September," PIMCO portfolio manager Konstantin Veit said. "A more recessionary configuration will likely be needed for the ECB to go faster and further in this cutting cycle."
Acknowledging near-term weakness, the ECB cut its inflation projection for next year.
U.S. President Donald Trump's tariffs are already damaging activity and will have a lasting impact even if an amicable resolution is found, given the hit to confidence and investment.
Most economists think inflation could fall below the ECB's 2% target next year, triggering memories of the pre-pandemic decade when price growth persistently undershot 2%, even if projections show it back at target in 2027.
Further ahead, the outlook changes significantly.
The European Union is likely to retaliate against any permanent U.S. tariffs, raising the cost of trade. Firms could relocate some activity to avoid trade barriers but changes to corporate value chains are also likely to raise costs.
Higher European defence spending, particularly by Germany, and the cost of the green transition could add to inflation while a shrinking workforce due to an ageing population will keep wage pressures elevated.
(Editing by Catherine Evans and Hugh Lawson)
Content Original Link:
" target="_blank">
