The economic hit from reciprocal tariffs, uncertainty, and tighter financial conditions likely exceeds what the ECB was expectingPrevious ECB assumptions that tariffs would boost inflation have been challengedRecent developments including higher EUR, lower oil prices, and greater risk of trade diversion are skewing inflation risks to the downside
Deutsche Bank believes the ECB will maintain a "meaningfully less restrictive" stance description despite the upcoming rate cut. They note that after 150bp of cuts, policy rates are getting closer to neutral, and combined with the view that inflation is returning to target, this has "an implicit dovish leaning."
Looking ahead, Deutsche Bank maintains its terminal rate call of 1.5% by year-end 2025, with further cuts expected in June, September and December. They note that while the pause in higher US reciprocal tariffs has "essentially shut down any possibility of a 50bp rate cut in April," the overall direction remains clear.
"This is a complex and dynamic shock," Deutsche Bank analysts write, indicating the ECB will need to remain nimble as conditions evolve.
This article was written by Adam Button at www.forexlive.com. Read More Details
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