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ECB rate cut cycle most likely over
- Macro economy
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Eurozone Q2 GDP Unchanged at 0.1%; we changed our ECB-view and now expect the ECB to Keep Rates on Hold at 2%
An unbalanced US-EU trade deal, given the EU’s weak hand
- Macro economy
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The US and the EU signed a trade deal last night that watered down the significant rise in tariffs that was due on 1 August, at which point the US administration was set to increase tariffs from the current 10% to 30%.
ECB happy on hold for now
- Macro economy
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The ECB kept its key policy rates on hold as expected.
Impact of Israel-Iran on inflation and interest rates
- Macro economy
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Muted reaction so far of energy prices to Israel-Iran escalation - The escalating conflict between Israel and Iran has raised concerns over the last few days about potential disruption to global energy supply. As a result, a risk premium has been priced into oil prices, which has oscillated between 5 and 10 dollars p/b depending on the prospects for escalation versus de-escalation. The relatively muted reaction of prices reflects that the impact on energy supply has been limited so far. At the same time, outside of potential impacts of the conflict, supply is growing more quickly than demand and that is expected to remain the case this year and next.
ECB likely has more to do, despite hints it is nearing the end
- Macro economy
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The ECB’s Governing Council decided to cut its policy rates by 25bp, taking the key deposit rate to 2%. The move was widely expected by analysts and priced in by financial markets. The comments in the press conference suggested that the Council considers it is nearing the end of its rate cut cycle. However, we think that further interest rate cuts are still likely. Indeed, we maintain the view that the ECB will cut policy rates further, with the deposit rate reaching 1.5% by September. The ECB’s more hawkish tone does raise the possibility that the rate reductions may take longer than that to materialise, with a pause possible at the next meeting.
ESG Economist - EU mulls softening climate ambitions
- Sustainability
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The European Commission is considering softening its 2040 emission reduction target according to reports. The EC may stick to a proposal for a 90% reduction by 2040, but make the emission reduction back-loaded with a slower pace to 2035. This target would be consistent with a carbon budget of around 1.7 degrees, even assuming an improbable collapse in emissions post 2035. In fact, even a 95% reduction would no longer be consistent with a 1.5 degree pathway given current emission trends. Meanwhile, the use of carbon credits to meet targets may also be allowed, which could push down on ETS prices, blunting incentives. It also seems likely that targets for 2030 and beyond will in any case be missed, which would make any 2040 ambition more difficult to be met.
Dovish ECB tone suggests more cuts to come
- Macro economy
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The ECB cut its key policy rates by 25bp as was widely expected.
ECB to cut rates at next four successive meetings
- Macro economy
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We expect the ECB to cut its key policy rates by 25bp at next week’s Governing Council meeting.
Tariffs risk recession - a forecast update
- Macro economy
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President Trump announced sweeping ‘reciprocal’ tariffs based on the size of the bilateral trade deficit. We expect both the US and the eurozone to slow sharply and only just skirt a recession, while the US will also have to deal with higher inflation. Monetary policy divergence is likely to re-emerge as a theme, with the ECB cutting rates further but the Fed remaining on hold. Fiscal stimulus should help drive a eurozone recovery in 2026, but growth improvement in the US next year will be more tepid.
ECB building to an April pause, but shocks will determine outlook
- Macro economy
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The ECB cut its key policy rates by another 25bp as was widely expected, taking the key deposit rate to 2.5%. In a sign that the Governing Council judges that interest rates are closer to neutral it noted that ‘monetary policy is becoming meaningfully less restrictive, as the interest rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up’. However, there were also clear signs that it does not see the job done quite yet.
