Sunday, May 4, 2025

ECB Signals June Cut as Trade Tensions Weigh on Growth

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The European Central Bank (ECB) is expected to cut interest rates twice, once in April and again in June, due to growing concerns over a potential recession.

This comes amid heightened fears that the Eurozone economy, which consists of 20 countries using the euro, could fall into a downturn as U.S. President Donald Trump continues to pursue aggressive tariff policies, including the announcement of reciprocal tariffs on April 2.

On Monday, the Financial Times reported that financial markets are pricing in a near-certain 0.25 percentage point cut to the ECB’s benchmark interest rate at the upcoming policy meeting on April 17.

Citing Bloomberg data, the FT noted that investors now assign a 90 percent probability to the rate cut—a jump from 70 percent before Trump’s April 2 tariff announcement, which he labeled “Liberation Day.”

Market sentiment suggests the ECB could deliver two or even three more rate cuts before the year ends.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said an April rate cut would mark the ECB’s seventh consecutive reduction. He added that a June cut now appears inevitable.

Ducrozet warned that any decision other than a rate cut could prove disastrous for the Eurozone economy.

He also questioned whether the ECB is simply injecting liquidity into the system or preparing for deeper, more substantial rate cuts to boost economic activity.

In an interview with the Financial Times, Yannis Stournaras—Governor of the Bank of Greece and a voting member of the ECB’s executive board—warned of an impending trade war.

Stournaras expressed concern that escalating trade tensions could expose the Eurozone to a significant negative demand shock, potentially leading to strong deflationary pressures.

Amid fears that Trump’s tariff policies could push the global economy into a recession, stock markets around the world, including New York, plunged for three consecutive days through Monday. Meanwhile, the value of the euro, considered a safe-haven asset, surged.

While a stronger euro may reduce import costs, it could also undermine Eurozone exports—heightening the risk of a demand shock.

Mahmood Pradhan, global macro head at Amundi Asset Management, noted that growth has suddenly become the primary concern globally, suggesting that economic weakness is now eclipsing inflation fears.

Central banks, once focused primarily on controlling inflation, are now expected to shift their attention toward mitigating the economic fallout from Trump’s trade policies.

Concerns over deflation are being further fueled by the possibility that Trump’s tariffs will lead to an influx of low-priced Chinese products into global markets.

Trump has continued to take aim at China since taking office. In addition to existing tariffs, he imposed an additional 20 percent tariff, and on April 2, he announced a further 34 percent reciprocal tariff.

On Monday, he warned that if China did not withdraw its 34 percent retaliatory tariff, the U.S. would impose an additional 50 percent tariff. Confronted with steep U.S. tariffs, Chinese manufacturers are now turning their attention to overseas markets outside the United States.

As U.S. tariffs increase, Chinese manufacturers are looking to offload their products in other markets, which could drive down prices and intensify deflationary pressures worldwide.

In response to these developments, Barclays has issued a bleak forecast, predicting that the Eurozone economy will fall into recession in the second quarter and continue contracting through the end of the year.

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