Rate cut, ECB remains cautious and studies inflation data
There are no tensions for now in terms of liquidity and stability of the banking system
3' min read
3' min read
The compass guiding the ECB's path is inflation. Navigating the storm of US tariffs, in the "phenomenal uncertainty" of these times as President Christine Lagarde called it, amidst the waves of financial turmoil and extreme volatility, the ECB is rightly aiming to maintain price stability, to fulfil its mandate and "ensure that inflation stabilises durably at the 2% medium-term objective".
At Thursday's meeting it is to be expected that the Governing Council - which has a data-driven approach - will decide whether to cut rates again (this would be the seventh cut since June 2024) or maintain the current deposit rate at 2.5 % on the basis of the updated assessment of the inflation outlook, core inflation dynamics and the intensity of monetary policy transmission. Taking into account that 'risks are everywhere' and 'uncertainty is everywhere'.
The ECB is likely to remain cautious, holding the 2.5 % floor pending new data and developments.
Keeping inflation under control is an extremely complex objective in the current context, because it is influenced by many variables in the eurozone: demand, consumer purchasing power, wages, duties and counter-duties, the health of the economy, the profit outlook of companies, credit conditions, confidence, inflationary expectations, financial stability, the quality of monetary policy transmission and more. Moreover, these variables are very unstable: as Lagarde pointed out, 'from one day to the next, the situation changes radically'.
So what does inflation look like on the brink of aworld trade war? Many of the current shocks contract demand and push inflation down: the tariffs wanted by Trump on imports, which drive up prices in the US and are a kind of tax on American consumers, are not good for the economy and a possible recession would put downward pressure on inflation in the eurozone. In a bad economy, the power of firms to move prices upwards is dampened, and this too is a disinflationary pressure. Energy prices have fallen a lot since the beginning of the year: oil has fallen by more than 15% and gas by more than 25% and this too has a downward impact on overall inflation. At the same time, if the EU were then to respond to Trump with new tariffs on imports of US products into Europe, this would put upward pressure on inflation in the eurozone in the short term.
