ECB cuts rates to 2%, GDP casts shadow over tariffs

The ECB does not disappoint expectations and cuts rates for the eighth time in a year, but it cools the hopes of those who expect a stronger push for growth. Other cuts, President Christine Lagarde suggests, are not so obvious, because monetary policy is now "well positioned to address the uncertainties" of these times, starting with tariffs. Moreover, inflation that is falling more than expected, stabilizing at the 2% target already this year, reassures the ECB that it finally sees the goal.

With the 25 basis point cut that took the deposit rate to 2%, "we are approaching the end of a monetary policy cycle," Lagarde said, explaining how this latest series of cuts "responds to shocks that have compounded one another, including Covid, the war in Ukraine and the energy crisis." The move was widely expected by markets, but they are now scaling back expectations for further cuts, at least in the short term.

Even though the ECB never mentions the word 'pause', most analysts expect the governing council to leave rates on hold at its next meeting on July 24. The trend in inflation is so encouraging that the Frankfurt staff has cut its estimates for the next two years by 0.3 percentage points. This year it will stop at 2%, next year it will even drop to 1.6% thanks to the collapse in energy prices.

In the absence of shocks, in short, the target is stably reached. But it is a premise that, in this period of great uncertainty, remains to be demonstrated. The commercial unknown is now weighing on the European outlook above all.

President Donald Trump's protectionist offensive risks compromising European exports, already made difficult by an increasingly strong euro that also gained on the dollar today. For now, the estimates on the GDP of the euro zone do not change much: Frankfurt confirms 0.9% in 2025, as in the March estimates, given "the more vigorous trend of the first quarter", while it is revised from 1.2% to 1.1% in 2026.

However, everything remains dependent on developments on the tariff front: "A further intensification of trade tensions in the coming months would lead to lower levels of growth and inflation than those in the baseline scenario of the projections", explain the economists of the ECB. In the worst-case scenario, that is, with duties of 20% on European goods, 120% on Chinese goods, and retaliation by the EU, the GDP of the euro area would fall by 0.4 percentage points this year, and by 0.5 next year. Despite the spectre of protectionism, the ECB sees signs of resilience: a solid labor market, a recovering wage dynamic and increasing public investments, such as those announced in defense and infrastructure, could provide a parachute in the event of new shocks.

Negotiations between Brussels and Washington are ongoing and, in the absence of an agreement, the additional tariffs of up to 50% announced by Trump will come into force on July 9. But the climate, more uncertain than ever, makes any prediction impossible.

For this reason, the ECB reiterates that it will move "meeting by meeting, guided by the data", Lagarde clarified, underlining the necessary prudence in a context marked by "exceptional uncertainties". In short, the governing council continues not to commit to a precise path in order to have freedom of movement if necessary. Faced with the new cut, the markets remain cautious. European stock markets close below 1%, the spread between BTPs and Bunds closes at new lows at 94.8 basis points, while the yield on the Italian ten-year bond rises by 3 and a half basis points, to 3.52%, signaling a reduction in expectations of further cuts. Meanwhile, to send further signals of stability, Lagarde wears a necklace with the words 'in charge', 'in command', and once again denies rumors of her possible entry to the Davos Economic Forum, reiterating her desire to complete her mandate, which expires in October 2027.

The conference of President Christine Lagarde