ECB Insight: April Meeting Outcome All Clear, Except of Course for the High Uncertainty
27 March 2025
ECB Insight: April Meeting Outcome All Clear, Except of Course for the High Uncertainty
- As of today, the stage is set more for another cut rather than for a pause
By David Barwick – FRANKFURT (Econostream) – As various European Central Bank Governing Council members have said, the main but not sole reason for which their 17 April decision remains highly uncertain is geopolitics, which we take to include most notably tariffs.
One thing that is fairly clear about that is the expectation of European retaliation, though we suspect that if the tariffs announced on 2 April are sufficiently far from living up to the hype, then this would call a tit-for-tat reaction into question.
Another thing is that Council members on both sides of the aisle see the tariffs in most scenarios as having a near-term upward effect on inflation and a medium-term downward effect on growth, with these effects not too far from cancelling each other out.
Indeed, more dovishly inclined members expect the latter effect to dominate the former and thus see chiefly downside risks to inflation, at least unless the tariffs turn out to be unexpectedly massive.
We also see risen optimism about getting a breakthrough in Ukraine, and though the devil will most certainly be in the details, peace, even if 'only' to the extent of safeguarding shipping in the Black Sea, would be helpful in terms of inflation.
It is true that fiscal developments will support activity and inflation, but the magnitude of the inflationary effect is subject to much debate and a concrete impact is not seen until next year, with the more salient aspect for now the increase in German bond yields.
In other words, barring the unexpected, the tariffs may not play a huge role and fiscal developments have gone in the direction of a tightening of financing conditions.
Meanwhile, it is clearly felt that inflation and wage developments are headed in the right direction; the comments about this most recently have been encouraging, starting with ECB President Christine Lagarde herself but also including Vice President Luis de Guindos, who has sounded even more optimistic.
Add to that a stronger euro, weaker energy prices and persistent economic weakness, all of which favour weaker inflation.
Then it is the case that what one might call the underlying sentiment is obviously in favour of lower interest rates. The only options in April are a pause or a cut, with virtually nobody thinking that 2.5% is as far as it goes. Council members tend to think they will get to 2.25% (the more hawkish) or maybe 2% (the more dovish).
We wonder also whether any of what Lagarde said at the 12 March ECB Watchers conference is relevant, in particular her acknowledgment that people expect the ECB to ‘help reduce, rather than amplify, uncertainty.’
Or her comment that the ECB’s ‘medium-term orientation enables us to avoid reacting to small or passing shocks that will have faded by the time the effects of a policy change kick in.’
Of course Lagarde also specifically noted the ECB’s inability to provide ‘certainty about the rate path’. And yet, when a few days later we saw de Guindos saying: ‘If we were to be as volatile as the markets, that wouldn’t be very reassuring’, it seemed to us easier to read between the lines of Lagarde’s speech that the direction of interest rates still isn’t all that unclear, so that circumstances permitting, the ECB would be more likely to lean in and stay the course, meaning cutting rather than pausing in April.
Consider the specifics of that de Guindos interview on 16 March, when he said: ‘At the same time, we need to keep in mind that factors like tariffs and fiscal policy are causing a lot of uncertainty. But taking this into account, we are confident that headline inflation will converge on a sustainable basis towards our 2% medium-term target towards the end of this year or the beginning of next.’
That doesn’t really sound like preparation for a pause.
And finally, we draw attention to our member-by-member reviews of the Governing Council, the first on 10 March and the second last Monday.
While we naturally both times had to consign a significant portion of the Council to the category of uncertain preference, what stands out for us is (i) the fact that the option of a pause never really enjoyed clearly high support, and (ii) the group of those wishing to continue easing grew over the intervening two weeks at the expense of those wanting to pause.
Except for Austrian Central Bank Governor Robert Holzmann, even hawks don’t necessarily seem against more easing in April. Thus we've seen:
- De Nederlandsche Bank Governor Klaas Knot saying ‘I remain open-minded’ a week ago
- Bank of Croatia Governor Boris Vujčić calling the April decision ‘a completely open question’ on Tuesday
- National Bank of Slovakia Governor Peter Kažimír declaring himself ‘open to discussing either further interest rate cuts or holding steady’ also on Tuesday
- Latvijas Banka Governor Mārtiņš Kazāks telling Econostream in an interview on 7 March that ‘[i]f we stay within the baseline scenario, then of course the rate scenario is incorporated in the forecasts. So of course that can still materialise.’
On balance, we are led to think that the Governing Council wants to cut in April and needs a reason not to cut rather than a reason not to pause. Of course, it may wind up with that reason, which can take any of various forms, including but not limited to:
- The bank lending survey suggests that financing conditions are surprisingly loose
- Spot inflation data or specific aspects of it like services inflation are unambiguously bad
- The 2 April tariff announcement somehow supports the expectation of the inflation impact dominating
In the end, the profound uncertainty makes any prediction as to the outcome of the next Governing Council meeting riskier than usual. What we can say with a much higher degree of confidence is that as of today, the stage is set more for another cut rather than for a pause.