European Central Bank officials are preparing to further reduce the interest ratesexpecting permanent damage to the economy by US duties, even if the Republican government Donald Trump softens its stance in the coming weeks.
After intense meetings at the International Monetary Fund (IMF) this week, most policymakers are frustrated by Washington. They predict that Donald Trump’s unpredictable behavior will continue to fuel uncertainty, limiting costs and investments – and eventually inflation for some time. The revaluation of the euro, the stricter funding conditions due to increased fiscal spending and the decline in energy prices will also burden prices, boosting the case for an eighth reduction in interest rates by one quarter of the unit in June.
What will happen below will largely depend on the updated inflation forecasts next year and later.
Bank of America economists, Deutsche Bank and Morgan Stanley are already seeing the deposit rate – today at 2.25% – falling to at least 1.5% this year to stimulate demand. While board members, including Olli Rehn and Gediminas Simkus, have marked that they are open to consider leading the cost of borrowing to these levels, others, such as Klaas Knot and Martins Kazaks, warn of excessive activism, arguing unclear.
ECB President Christine Lagarde remained largely in the official ECB line. “When the size and distribution of shocks are extremely uncertain, we cannot provide certainty with the commitment to a specific interest rate course,” he told Finance Ministers and fellow central bankers on Friday (25.4.2025).
Earlier in the week, he said the ECB should be “extremely dependent on the data”. Most of the latest reports indicate weaker development potential in the future. A market research revealed depressing confidence and sluggish demand, while IMF forecasts published on Tuesday (22.4.2025) downgraded the expansion of the 20 countries to just 0.8% this year from 1%.
Modern growth is accompanied by lower inflation. The IMF, like the ECB, predicts that prices will reach 2% at some point in the second half of the year. But compared to what has been shown by some policy -makers who visit Washington from Europe, his message is more hawk.
Achieving the goal of 2% “can be achieved by another 25 -point reduction,” Alfred Camer, director of the European Department of the IMF, told reporters on Friday. “We do not see the need to go lower than 2%” in the absence of “significant shocks”. This threshold is considered by economists to be the closest assessment of neutral, which does not facilitate or limit demand.
It could be transformed into a critical point where policy makers, especially the most “aggressive”, may be reluctant to pass. “If inflation is significantly short of the target and for an extended period of time, the natural option would be to reduce interest rates in the incentives,” said Kazaks, who heads the Central Bank of Latvia, in an interview on Saturday (26.4.2025). “This is not the case at this time.”
His Dutch colleague, Klaas Knot, argued in a speech on Wednesday (23.4.2025) that neutrality “remains in general the place to exist”. While inflation can slow down faster than expected before, he argued that the long -term effects on commercial disorders and higher European defense and infrastructure costs are “much less clear”.
Its comments indicate that the ECB on June 5 – at the last meeting in which it participates before its term of office – will be forced to reduce the prospects for rising consumer prices next year from the 1.9% predicted in March. But it is the measurement of 2027 that will be important to estimate whether the prices will be fixed afterwards.
Despite the uncertainty, some of his colleagues are almost ready to declare victory. The French Francois Villeroy de Galhau argued that “there is currently no inflationary risk in Europe”. His colleague Peter Kazimir of Slovakia agreed that inflation would approach his goal in the coming months – instead of early 2026, as was only projected last month.