ECB Preview: A cut in April while keeping full flexibility and optionality

We expect the ECB to cut its three key interest rates by 25 bp s at next week’s meeting, a cut that is almost fully anticipated by the market. In our view, t his new cut is justified by several reasons. First, the disinflation process remains well on track, notably with a significant easing of inflation in services . Second , Trump’s tariffs – and the uncertainties around them - pose s clear risks to the growth outlook . The impact on inflation is much more uncertain, depending notably on potential retaliation measures from the EU and supply chain disruptions , but medium-run effects remain disinflationary. In the short term, the decrease in oil prices and the appreciation of the euro give some room for maneuver . Thirdly , monetary policy remains in restrictive territory - although “meaningfully” less than in the past. Looking beyond April, we anticipate an additional and final 25 bps rate cut in June. However, with the June meeting scheduled on June 5th — two months away —, this decision seems far off. Our baseline scenario remains more cautious than market expectations, as our inflation forecasts indicate higher inflation expectations compared to current inflation fixings. Should there be a downside surprise in inflation, we will likely adjust our outlook to include an additional rate cut by the end of 2025 . We think the ECB will keep the head cold despite the unprecedented level s of uncertaint ies , particularly concerning U.S. trade policy. Consequently, we anticipate that the ECB will continue its data-dependent approach, making decisions on a meeting-by-meeting basis, with C. Lagarde emphasizing the importance of maintaining full optionality and flexibility. The ECB is closely monitoring the market moves and we are confident they are ready to act in case of systemic market disruptions or unjustified widening of European spreads – which is not the case as of today. However, if market stress persists, the ECB might consider pausing its quantitative tightening and will remain ready to provide the necessary liquidity as it has done in the past .