Tariff threats of economic recession, market expects ECB to cut interest rates "twice in a row" in April and June

The tariff shock is likely to push the Eurozone into a prolonged recession, with the market already pricing in consecutive interest rate cuts by the European Central Bank in April and June.

After Trump announced the tariff plan, the market began to reprice expectations for the ECB's monetary policy. Bloomberg data shows that the market now expects a 90% probability of a rate cut by the ECB on April 17, up from 70%, and anticipates two to three more cuts within the year. Previously, the ECB had cut rates five times in a row.

Frederik Ducrozet, head of macro research at Pictet Wealth Management, believes that a 25 basis point cut in April and another cut in June “has indeed become evident,” and any other decision would be “catastrophic.”

The Cologne Institute for Economic Research estimates that a 20% tariff on EU imports from the U.S. could lead to an economic loss of up to €750 billion in the Eurozone during Trump's four-year term, a blow that would far exceed any potential inflation threat.

This means that investors and policymakers are no longer facing the question of “whether to cut rates,” but rather “whether the rate cut is sufficient.”

Mahmood Pradhan, global macro head at Amundi Asset Management, stated:

“Growth has suddenly become the key issue facing the world, and Europe is no exception. This will surpass concerns about inflation, which is more of a U.S. issue. This means Europe will implement easing policies.”

Ducrozet noted that the key question is whether the outlook will become so dire that the ECB will be forced to turn to larger rate cuts to stimulate the economy or provide liquidity support.

From Inflation Concerns to Deflation Threats: ECB Faces a 180-Degree Turn

Many analysts warn that the impending trade war will have a far greater impact on Eurozone growth than any potential inflation threat.

Yannis Stournaras, Governor of the Bank of Greece, told the media that the upcoming trade war will subject the Eurozone to a large-scale “negative demand shock” and will create severe deflationary pressures.

Gilles Moëc, chief economist at AXA Investment Managers, stated:

“The slowdown in the real economy, falling energy prices, and a stronger euro will accelerate the decline of inflation in Europe.”

Economists at Barclays even predict that the Eurozone will fall into recession in the second quarter, lasting until the end of 2025.

Currently, the Eurozone's inflation rate in March has dropped to an annual rate of 2.2%, close to the ECB's mid-term target of 2%. Barclays predicts that by October, the ECB will significantly cut rates from 2.5% to 1.25% and restart unconventional monetary policy measures such as bond purchases in the second half of the year.

The Bank of England Also Faces Rate Cut Pressure

Despite the UK’s consumer prices rising 2.8% year-on-year in February and strong wage growth (with a wage growth rate of 5.9% over the past three months), the market has almost fully priced in a 25 basis point rate cut by the Bank of England on May 8.

UK Chancellor Rachel Reeves warned that even if the UK manages to reach a trade agreement with Trump, it will still be dragged down by the global economic slowdown that the trade war may cause James Smith, an economist at ING Group, stated that the UK has not yet taken countermeasures against US tariffs, which may mitigate the inflationary impact of trade hostilities.

"If there is any impact, as economic growth cools and the threat of dumping from other major global producers rises, it may have a deflationary effect in the future, and we expect the Bank of England to continue to cut interest rates once each quarter for the remainder of this year."