Thoughts

February 28, 2025 | 15:00

Taking the Screws to the ECB’s Decisions

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)

What’s changed since the ECB’s January 30th meeting, when the deposit rate was lowered 25 bps to 2.75%? Euro Area inflation expectations have been stable. Broader inflation has been little changed at 2.5%, while core remained at 2.7%, and services inflation ticked lower but to a still-high 3.9%. Input costs, though, in the services sector, hit a 2-year high in February, which will need to be watched. Although the jobless rate remains near a record low, negotiated wage growth slowed in the most recent quarter, which the ECB has been expecting. Economic confidence hit a 5-month-high, and private sector credit grew at its fastest pace in nearly two years. The Euro Area economy, thanks to revisions, actually grew in Q4—but barely. Judging by the latest PMI, some may classify it as stagnating.

So, we continue to expect another 25 bp rate cut on March 6th. It is what happens after that meeting that is more complicated. First, there were already reports that some members, in January, felt that a “broader, deeper debate” would be required in March, and some no longer wanted to describe the stance as being “restrictive”, all pointing to an April pause. Second, U.S. President Trump now has his sights trained on the EU and has threatened to slap a 25% tariff on all of its goods imports from the region, which totalled over $605 bln in 2024, or nearly 20% of all U.S. imports. (Note that is far more than Mexico’s $505 bln, or 15% share, and Canada’s $413 bln, or 13% share.) And given that the U.S. has a record $235 bln trade deficit with the EU, second to China’s $295 bln, it is no wonder that the President is seeing red. But that is for goods only. Note that the U.S. has a surplus in services with the EU, of over $75 bln, which is a quarter of the broader U.S. services surplus.

This adds to the downside risk to growth that the ECB flagged at the January meeting: According to the Minutes, the staff economic projections were described as “too optimistic”. There is also a big question mark around the inflationary impact from tariffs. Belgium’s Pierre Wunsch warned that “inflation will be the boring part of 2025 in Europe” due to other issues such as tariffs and geopolitics. Italy’s Fabio Panetta is concerned that the labour market is starting to weaken. But Executive Board member Isabel Schnabel cautioned that the ECB may need to take a break from easing. Ultimately, what the U.S. does with tariffs (how high and for how long), and how the EU retaliates, will determine what actions the ECB will take. The European Commission already declared that it will “react firmly and immediately against unjustified barriers to free and fair trade”. We may also see more fiscal spending across Europe, including from the new German coalition (once it is formed), and less regulation (gas storage targets may be relaxed), which will help the economy.

For now, we will stick with our call for the deposit rate to end the year at 2.00%. But that can change very quickly.