ECB Insight: Has the Terminal Rate Risen? With No One Claiming It Has, an April Cut Looks Likelier

4 April 2025

By David Barwick – FRANKFURT (Econostream) – In the immediate aftermath of the imposition by the US of sweeping tariffs on the rest of the world, we can’t help but notice that nobody from the European Central Bank’s Governing Council has actually suggested that this is a new reason to put the monetary policy easing process on pause this month.

Of the five Council members who have spoken out since the US announcement, ECB Vice President Luis de Guindos’ focus on radically higher uncertainty probably went the farthest towards suggesting that all bets were off.

However, the need for policymakers, in his words, to be ‘extremely prudent’ and ‘stick even more closely to our data-dependent and meeting-by-meeting approach’ is not per se inconsistent with cutting interest rates, and could theoretically support this outcome more than any other.

Bundesbank President Joachim Nagel’s claim that the US decisions would put what European monetary policy had managed to achieve ‘to the test’, like his call for the Eurosystem to 'reassess the situation', strike us as an exercise in speaking without saying much of anything.

To be sure, out of an abundance of caution we yesterday reassigned Nagel – along with de Guindos – to the group of policymakers of uncertain inclination in our member-by-member review of the Governing Council with respect to the coming decision.

And yet, Nagel’s appeal to reevaluate things was not paired with any explicit warning that the inflationary impact of the tariffs would dominate, or that the achievement of price stability in a timely manner was no longer likely.

‘Global economic growth will slow’, he said. ‘Prices will rise. Overall, the level of uncertainty among economic actors will increase.’

There being nothing here not predicted well before the tariffs were unveiled, not only did Nagel not say anything new, but he also delicately avoided anything that would allow observers to say that his uncertainty – understandably higher – would translate to more or less reluctance to cut rates in April.

As for National Bank of Slovakia Governor Peter Kažimír, we had always assumed that he would be reluctant to cut, so little has changed if one interprets his comment yesterday to mean that he is now yet less disposed to want to ease policy further.

‘These developments are, to a large extent, already factored into our forecasts among the worst scenarios we must brace for’, he said.

If however he instead meant that the blow to the economy is about the severest envisioned, then perhaps this could actually be interpreted dovishly.

Bank of Greece Governor Yannis Stournaras and Bank of Portugal Governor Mário Centeno were both previously pillars of the ‘cut camp’, and remain so. That Centeno called it ‘too early to assess’ the new situation should on no account be considered an expression of likely hesitancy to cut 13 days hence.

What we are looking for, and still lack, is a credible suggestion that the ECB’s likely terminal rate should now be substantially higher than previously. Meaning higher than 2% (the doves' vision) or even 2.25% (the hawks').

Assuming it hasn't risen, or even if the environment is still too uncertain to answer the question, then we don’t see what the ECB has to lose by cutting in April in line with the rate expectations incorporated in its projections.

If the ECB cuts in April and, come June, the new forecasts indicate that yet more easing is still called for, then the ECB can cut in June and take comfort from the fact that, by having cut in April, it avoided being forced to consider a 50bp cut in June, which would add to the uncertainty and volatility.

If the ECB cuts in April and the June forecasts show that maybe the correct terminal rate has risen slightly, then it can simply not cut in June or thereafter.

For an April cut to have been regrettable, the June forecasts would have to show that the proper terminal rate has essentially already been reached and is thus significantly higher than anyone except Austrian National Bank Governor Robert Holzmann has to date suggested (a view he took, characteristically, before the tariffs were announced).

But only if such a June outcome is considered reasonably probable as of now would it be a mistake a priori to cut in April. And as of now, again, no one appears willing to say that the tariffs are likely to exert an inflationary impact that would be consistent only with a markedly higher terminal rate than almost anyone was thinking in terms of previously.

To be fair, it is still early. The ECB may want to await pending responses not only from within its own jurisdiction, but from others as well, given the global nature of the issue. Perhaps only then will it make any sense to run the models and see what these spit out.

Of course, uncertainty will persist for the foreseeable future, so Governing Council members may not necessarily have the luxury of robust projections before their next decision no matter what.

That is, what they know now may reasonably approximate what they will know on 17 April. And with the euro so much stronger and the regional and global economy facing such powerful headwinds, it is easier for us to imagine that proceeding in line with the rate expectations of existing forecasts will make sense the week after next.