Under the impact of the trade war, the European Central Bank vows to continue easing to the end!

Under the impact of tariffs, the European Central Bank (ECB) has clearly shifted its monetary policy towards a dovish stance, with the market expecting further interest rate cuts in June and beyond.

Recently, Citigroup and Bank of America Merrill Lynch both released reports on the ECB's latest policy meeting, with both institutions believing that the ECB's policy stance has turned dovish and expecting further rate cuts to address the downside risks to economic growth and inflation.

Citigroup believes that the ECB not only cut rates by 25 basis points as expected, but more importantly, confirmed that the policy discussion has shifted from "whether monetary policy is restrictive" to "whether easing is needed." Further rate cuts are expected in June and beyond.

Bank of America Merrill Lynch also believes that the 25 basis point rate cut and dovish tone indicate that the ECB is prepared to enter the easing territory if necessary. It is expected that the ECB will lower the deposit facility rate to 1.5% or even below.

Wallstreetcn previously mentioned that the ECB announced its latest interest rate decision on April 17, cutting rates by 25 basis points as expected, lowering the deposit facility rate from 2.5% to 2.25%, marking the seventh rate cut since last June. ECB officials removed the term "restrictive" from the statement regarding the monetary policy stance.

Looking ahead, both Citigroup and Bank of America Merrill Lynch believe that the upcoming ECB economic forecast to be released in June will be key information in determining the subsequent policy path.

Bank of America Merrill Lynch expects that the economic forecast at that time may show that the medium-term inflation rate is closer to 1.5% rather than the 2% target, which will further strengthen the rationale for adopting an accommodative monetary policy.

Citigroup also believes that future economic data performance, especially growth and inflation data affected by U.S. trade policies, will continue to guide the ECB's interest rate decisions downwards.

Citigroup: From Restrictive to Accommodative

The Citigroup report emphasizes that the ECB's communication indicates that the focus of policy discussions has shifted from "whether monetary policy needs to remain restrictive" to "whether a shift to easing is needed."

The report points out that discussions assessing whether monetary policy is restrictive are no longer a relevant reference for policy decisions, which aligns with Citigroup's previous argument that in the face of new shocks, attention should be paid to changes in the interest rate path relative to previous assumptions rather than the neutral level.

Although the ECB did not provide clear guidance on future interest rate paths this time, the president emphasized the management board's readiness to act and the flexibility of the policy during the press conference.

The Citigroup report notes that the description of upside and downside risks in the ECB's monetary policy statement is clearly unbalanced. The downside risks stem from demand shocks caused by U.S. tariff policies, while the upside risks mainly include hypothetical weather events and their impact on food prices. If this is the only upside risk to worry about, then the probability of rate cuts in the coming months is evidently high.

Citigroup believes that the market has developed a fairly clear expectation of future policy direction, with tightening financing conditions, uncertainty shocks, and demand shocks caused by tariffs all clearly indicating that the ECB will lower growth and inflation forecasts in June, with inflation expectations for 2026 likely just above 1.5%. These are sufficient to justify Citigroup's expectation of a 25 basis point rate cut in June and at least two more 25 basis point cuts thereafter.

Bank of America Merrill Lynch: The Policy Door is Open, Thresholds May Be Broken

The Bank of America Merrill Lynch report points out that a 25 basis point rate cut and an overall dovish tone clearly indicate that the European Central Bank is prepared to bring policy rates into the "easing territory" when necessary.

Based on this judgment, Bank of America Merrill Lynch maintains its forecast that the deposit facility rate during this round of rate cuts by the European Central Bank will reach 1.5%.

The report further notes that the risk of delaying rate cuts has diminished under the current circumstances, while the likelihood of larger rate cuts in the future is increasing.

Although 1.5% is the baseline forecast, Bank of America Merrill Lynch believes this is more like a "ceiling." Unless significant changes occur to prevent the European Central Bank from lowering rates below 2%, various scenarios could lead to policy rates being below 1.5%.

The Bank of America Merrill Lynch report suggests that the European Central Bank's economic forecasts in June will become a key reference point for the policy path. Based on existing information, these forecasts may indicate that medium-term inflation is closer to 1.5% rather than 2%, which would suggest the need for an accommodative monetary policy.

Bank of America Merrill Lynch also lists a series of dovish signals in the report, indicating that the European Central Bank is considering a shift towards easing:

The European Central Bank's concerns about the economic outlook, particularly regarding the impact of trade policies and uncertainty, have significantly increased;

Although interest rates may no longer be restrictive, "financial conditions may be tighter," necessitating lower rates;

The neutral rate is viewed as a balancing concept, while the current economy is not in a balanced state;

The downside risks to inflation have increased (exchange rates, energy, financial conditions, trade restructuring), with only defense seen as a potential upside risk;

The removal of the statement that inflation is broadly in line with forecasts indicates the central bank's concerns about inflation potentially declining