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ECB Watch - A less independent Fed could mean more ECB cuts
- Macro economy
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The US Federal Reserve is coming under unprecedented pressure as an independent institution. As the central bank standing behind the world’s reserve currency – and the world’s biggest, most liquid bond market – this has implications that reach well beyond US shores. Our base case sees the Fed turning dovish from next year onwards, but not fully losing its independence. In that regard, whether Trump succeeds in firing board member Lisa Cook before February 2026 is the key factor to watch [1]. In this Q&A, we explore from a big picture perspective what impact the Fed’s potential loss of independence may have on the ECB, the eurozone economy and on financial markets. We consider both the spillovers from the Fed’s actions as well whether the ECB could come under similar pressure from European politicians.
ECB set to stay on hold, despite inflation undershoot
- Macro economy
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The ECB kept its policy rates on hold in September, for the second consecutive meeting.
ECB preview: The ECB’s rate cut cycle…it’s probably over
- Macro economy
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The Governing Council kept policy on hold in July, and is likely to remain on hold at the September meeting and for the foreseeable future.
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.