Tariff threats to economic growth, will the ECB be forced to cut interest rates tonight?

Under the pressure of U.S. tariffs, rumors of the European Central Bank (ECB) pausing interest rate cuts have been quelled. Investors are now almost certain that the ECB will lower the deposit rate to 2.25% at the meeting on April 17, and will cut rates at least two more times by the end of the year. The trade tensions have severely impacted investor confidence, with concerns about economic growth dominating the narrative, which may force the ECB to continue its rate-cutting path.

Tariff Policy Reshapes ECB Decision-Making Path

A Bloomberg survey shows that almost all analysts expect the ECB to lower the deposit rate from 2.5% to 2.25% this Thursday. Among the 62 analysts surveyed, only one predicted a pause in rate cuts, while another anticipated a larger cut.

In addition to this week's rate cut, investors expect at least two more cuts by the end of the year, as the strengthening euro helps to curb price pressures, while the likelihood of low-cost goods shifting to Europe is increasing.

Against the backdrop of ongoing uncertainty in trade negotiations, ECB President Christine Lagarde is unlikely to provide clear guidance on the next steps for interest rates. Lagarde's press conference will be held at 2:45 PM Frankfurt time, 30 minutes after the central bank's decision is announced.

Officials including François Villeroy de Galhau, Governor of the Bank of France, Olli Rehn of Finland, and Gediminas Simkus of Lithuania have recently expressed support for further easing policies. However, a few officials still urge caution. Austria's Robert Holzmann stated that he sees no reason for a rate cut but acknowledged that he "is always willing to accept good arguments."

Trade Conflict Hits Investor Confidence

Trump's tariff policy has severely impacted investor confidence. The ZEW Institute's investor confidence index plummeted from 51.6 last month to -14 in April, far below analysts' expectations of 10.

Achim Wambach, director of the ZEW Institute, stated in a release: "The erratic changes in U.S. trade policy are severely affecting expectations in Germany. Not only the announced reciprocal tariffs may have consequences for global trade, but the dynamics of their changes also greatly increase global uncertainty."

Financial markets reflect the current pessimism. Since Trump announced the tariff measures, Germany's DAX index has fallen by 5%. Audi has suspended product deliveries to the U.S., with goods arriving after April 2 temporarily not being delivered to dealers. Mercedes-Benz is also considering withdrawing its cheapest car models, as the newly imposed tariffs mean that selling these models is no longer economically viable.

Balancing Deteriorating Economic Growth Outlook and Inflation Concerns

Germany's top economic research institutes have downgraded their economic growth forecast for 2025 to just 0.1%, warning that the situation could worsen. This could mean that the German economy contracts for the third consecutive year, highlighting the vulnerability of Germany's export-dependent economy and emphasizing the need to rethink the country's business model.

While some ECB officials are concerned about the inflation effects of Trump's tariffs, respondents to the ZEW survey are less worried. Wambach stated:

Financial market experts currently do not perceive the risk of inflation in Germany and the Eurozone potentially soaring again.

According to their assessment, this provides room for the European Central Bank to boost the economy through further interest rate cuts.

The Wall Street Journal analysis suggests that the European Central Bank faces challenges on a game theory level, needing to find a balance between maintaining economic growth and controlling potential inflationary pressures. However, the current market consensus still leans towards viewing tariff policies more as a growth risk rather than an inflation risk, which provides justification for the European Central Bank to continue its path of interest rate cuts.

Investors should closely monitor the European Central Bank's decisions and Lagarde's remarks on Thursday for clues about future policy directions, while also being wary of potential changes in trade policies from the Trump administration and their impact on global markets