ECB April meeting: A “Dovish” Rate Cut Amid Tariff Uncertainties

The European Central Bank lowered its three key interest rates by 25 bps, in line with our expectations. The deposit rate was cut by a quarter-point to 2.25%. The decision was unanimous, which came as a surprise as Bank of Austria G overnor R. Holzmann had advocated for a pause prior to the silent period one week ago . C. Lagarde indicated that there was no support for a 50-bps rate cut. As anticipated, the ECB reiterated its data dependence and meeting-by- meeting approach . C. Lagarde highligh ted the ECB's agility and readiness in navigating the current very uncertain economic environment . Surprisingly, there were no questions about ECB Quantitative Tightening. The growth outlook has weakened; however, the impact of tariffs on inflation remains uncertain As widely anticipated, C. Lagarde acknowledged that, despite some resilience to global shocks, the euro area growth outlook has deteriorated due to escalating trade tensions and significant uncertainties, which are likely to dampen confidence among households and businesses. Regarding the impact of tariffs on inflation, the jury is still out. C. Lagarde noted that the effects of tariffs on inflation are not clear yet and will only become clearer over time. She highlighted several short-term downside risks to inflation, including declining oil prices, the appreciation of the euro, and potential overcapacity resulting from a slowdown in economic activity. Conversely, she pointed out that the fragmentation of global supply chains, along with increased defense and infrastructure spending, could contribute to rising inflation in the medium term. The ECB removed its restrictive bias The statement was broadly in line with our expectations, except the drop of the reference to a “meaningfully less restrictive” monetary policy . While we anticipated that C. Lagarde acknowledged tighter financial conditions in line with our Natixis financial conditions index due to recent market developments, she explain ed the language regarding restrictiveness was removed from the monetary policy statement because it was needed in the past when they were far from target but that this has become “meaningless at this point.” We see the drop of this restrictive bias as a clear dovish tilt . A new 25 bps rate cut in June with increasing risks of further rate cuts depending on the inflation path We stick our view of a new 25 bps rate cut in June. However, d ownside risks on growth, the removal of the restrictive bias on mon etary policy stance and some downside risks on inflation in the short term led us to consider further rate cuts, after we have updated our inflation forecasts.