ECB Insight: Another 25BP Cut, With a Vow of Readiness but No Explicit Encouragement of June

15 April 2025

By David Barwick – FRANKFURT (Econostream) – While US President Donald Trump may have declared a 90-day pause before (reduced) tariffs take effect, and dealmaking to further cushion the blow to Europe is likely, the European Central Bank is not about to dismiss the entire tariff episode as a tempest in a teapot.

That is, the ECB does not see itself as back to where it was before the infamous tariff announcement of April 2, and it would be an optimist indeed who expected the world to return to that state at any point in the foreseeable future, if ever.

Given the confidence we expressed here on March 27 that the stage for April 17 was ‘set more for another cut rather than for a pause’, against the backdrop of the turmoil US trade policy has triggered in the last two weeks we are naturally all the more convinced as of today that a cut is the likelier outcome on Thursday.

It has grown more difficult to rebut the argument we discussed here on April 4, when we also said a cut was more probable.

That argument says that the cost of an April cut is low, because if the June projections and intervening developments support more easing, then an April cut will spare the ECB from potentially falling behind the curve and having to mull a 50bp cut in June, which would be deservedly embarrassing.

If on the other hand the ECB has reason to consider 2.25% the end, the level to which a cut this week would take it, then it need simply refrain from cutting again, whether in June or thereafter.

An April cut will only turn out to be a mistake in June if the June projections indicate that the ECB should have stopped at 2.5%. But even then, from today’s perspective that seems less likely to be a mistake than pausing, leaving a cut as the correct move on Thursday.

The argument hinges on the idea that as of now there is at least a bit more easing to be done, but one scarcely requires the tallies of the Governing Council we have done in recent weeks to see that with rare exceptions, most policymakers expect a terminal rate below the DFR’s current level of 2.5%.

That was the case even before April 2, and since then we see evidence of increased concern about the downside risks to growth, flanked by risen worries regarding financial stability. Those preoccupied with upside risks to inflation are in a minority whose membership has shrunk further.

Given the reasonable cost of a cut, we expect a large majority of Council members to get behind this option on Thursday. In fact, we don’t exclude unanimity or near unanimity. This rests on how successful President Christine Lagarde is in addressing the concerns of a few policymakers who fret that in cutting, the ECB will inadvertently encourage runaway easing expectations.

With the ECB likely amid extreme uncertainty to adhere as closely as ever to its data-driven, meeting-by-meeting approach, its options for dampening such expectations are limited. The challenge may come down to finding universally acceptable language with respect to the restrictiveness of the policy stance.

The ECB would probably prefer to leave in place the current wording (‘meaningfully less restrictive’), this formulation having only been introduced at the March meeting, and it is by no means certain that it won’t.

For example, rather than changing it again, the ECB could depend on the cumulative nature of ‘less’. That is, if policy is again ‘meaningfully less restrictive’, then it is less restrictive (indeed, meaningfully so) than it was the previous time. Lagarde can easily make sure this point is not lost on anyone. Still, changing to ‘yet less restrictive’ or the like would be clearer.

Another option if the language doesn’t change could actually be accepting dissent, though Lagarde is known for aiming for unanimity. Still, not for nothing do markets care about the degree of support behind a collegial decision.

It might thus be in the ECB’s strategic interest to let a few naysayers remain in the opposition as an implicit way of making evident to markets that the sky is not the limit. A cut will not need universal endorsement.

All in all, we tend to think that the language will change, though we question the need for anything dramatic, also in light of the latest bank lending survey earlier today. A simple solution might be to ban the fragment in question from the monetary policy statement and make clear that it is less apt to assess restrictiveness in a way that suggests a lasting conclusion has been drawn.

In any case, the ECB is unlikely to want to seem to encourage any expectations of what will happen in June.

If the language is sufficiently non-committal, Austrian National Bank Governor Robert Holzmann may back it. He is holding out precisely for such an outcome, which is doubtless why a week ago when reiterating his preference for a pause, he added that he was ‘willing to wait and learn and change my mind’.

As noted above, financial stability concerns are on the rise. We think the wish to make clear that the ECB takes the situation seriously will help ensure that a cut is at least very widely supported. Lagarde will note such concerns and highlight the ECB’s readiness to do what the defence of stability requires.

She is also likely to note that the disinflation process continues well on track, as reinforced yesterday by the Survey on the Access to Finance of Enterprises (SAFE) for the first quarter, which showed wage growth expectations down again on tamer expected pressures in the services sector.