Thoughts

April 17, 2025 | 15:45

ECB Eases Given Exceptional Uncertainty

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

There were many reasons why the ECB did not have to cut rates on April 17. The Press Release outlined them very clearly: the disinflation process is “well on track”; wage growth is “moderating”, and the economy has been “building up some resilience against global shocks”. I would also include the coming wave of fiscal support (Germany, Brussels, everyone else), and the fact that we are in a cooling-off period (was 90 days, now 83) where the U.S. has paused reciprocal tariffs, the EU has paused its retaliatory tariffs on the metals levy, and talks (vague as they are) have begun. Finally, Italy’s PM Meloni sat down with President Trump on the same day and proved to be the ‘Trump whisperer’. Italy agreed to boost LNG imports and work on nuclear together. Trump said "100% there will be an EU tariff deal"; and, he accepted an invite to visit Italy. In any event, the ECB cut its main policy rates by 25 bps, leaving the deposit facility at 2.25%, the refi rate at 2.40%, and the marginal lending facility at 2.65%.

Why did it cut? Two words: exceptional uncertainty, which comes from this negative demand shock. The “cloud of uncertainty” has the potential to impact households’ and firms’ decisions to spend and invest (FYI... this is happening everywhere), and the stronger EUR could slow exports. President Lagarde also pointed out the possibility of exports being “re-routed” to Europe by markets that are “subject to much higher tariffs”. China was never named, but it was obvious that’s who she was referring to.

When pressed by a reporter about the relationship with the U.S., the ECB head spoke more broadly, citing “confidence, predictability and a reasonable level of certainty”, three factors needed by central bankers to make decisions. And the need for access to data, or “safe data”, and for transparency. Hence, the ECB will remain on a data-dependent, meeting-by-meeting, non-committal path, which requires readiness and agility to act in the face of unpredictability.

The decision was unanimous, although there was the usual debate about the various options. President Lagarde stressed that no one argued for a 50 bp cut. (She also noted that “a number of governors a few weeks ago would have argued in favour of a skip”.)

Bottom Line: Much like other central banks, the ECB has no idea where this trade war is headed. Even the IMF called this “off-the-charts” trade uncertainty. But it is clearly prepared to lend more support, as needed, alongside the fiscal stimulus coming from other governments. We continue to look for the next cut to come in June.