Tariff shocks impact economic outlook, ECB's interest rate cut tonight is almost a certainty

According to the Zhitong Finance APP, the European Central Bank will announce its interest rate decision at 20:15 Beijing time on Thursday. Due to the impact of U.S. tariffs on global trade, which has dimmed inflation and economic prospects, the market generally expects the European Central Bank to lower the deposit rate by 25 basis points to 2% on Thursday, marking the eighth rate cut in this cycle.

The market also anticipates that the European Central Bank will cut rates again in September, by which time negotiations with the U.S. should have concluded, and new forecasts will reveal the full impact of the tariffs.

The market widely expects the European Central Bank to cut rates in June.

Goldman Sachs Chief European Economist Jan Hatzius stated, "The European Central Bank is in a difficult position." He noted that, in addition to trade issues, the lack of specific details on fiscal stimulus makes "all of this challenging for making the right adjustments to monetary policy."

This may prevent European Central Bank President Christine Lagarde from providing clear signals regarding the interest rate trajectory after June. Lagarde will hold a press conference following the interest rate decision announcement.

On Thursday, German Chancellor Friedrich Merz will also discuss trade issues with U.S. President Trump at the White House, while NATO defense ministers will discuss increasing spending targets and support for Ukraine, highlighting the rapidly changing global situation that the European Central Bank must address.

The rate cut cycle may be nearing its end

Both hawkish and dovish policymakers have indicated that they have largely completed the work of lowering borrowing costs, with some officials even openly discussing slowing the pace of easing.

European Central Bank Governing Council member Fabio Panetta stated last week that anti-inflation measures are "currently nearing completion." This statement may imply that the wording in the European Central Bank's policy statement will be adjusted, and it may also mean a pause in rate cuts in July.

European Central Bank Governing Council: Hawks and Doves

Economists have predicted that the European Central Bank will pause rate cuts next month. However, they also warn that the European Central Bank cannot remain inactive for too long, or the market will believe it has completely stopped cutting rates.

Traders are betting that after a possible pause in rate cuts in July, the European Central Bank will cut rates again, bringing the deposit rate down to 1.75%. This rate is at the lower end of the neutral rate range set by the European Central Bank. The neutral rate refers to the level of interest rates that neither stimulates nor suppresses the economy.

Economic forecasts are likely to remain largely unchanged

Analysts predict that despite Trump's efforts to reshape global trade and the fundamental changes in the economic backdrop, the European Central Bank will largely maintain its previous forecasts The euro has strengthened significantly compared to March, and energy prices have also become cheaper, bringing downward pressure on prices this year and providing some relief to companies affected by weak demand.

Previously released data showed that the eurozone's economic growth in the first quarter exceeded expectations, as companies (especially those heavily reliant on exports) rushed to fulfill orders in an attempt to complete them before U.S. tariffs took effect.

Market expectations suggest that the European Central Bank will largely maintain its economic forecasts.

Trump is currently threatening to impose tariffs of up to 50% on European goods starting July 9. The EU is preparing countermeasures, which could trigger a tit-for-tat struggle leading to higher tariffs, but may also initiate negotiations for a more sustainable agreement.

The outcome of the negotiations is difficult to predict, but it is crucial for forecasting the economic outlook of the eurozone. The uncertainty is further exacerbated by whether governments can implement large-scale defense and infrastructure plans.

To better grasp potential future scenarios, the European Central Bank has developed several scenario forecasts, which will be presented alongside the baseline forecast. One policymaker indicated that the likelihood of the baseline forecast being realized is less than 50%.

Political noise follows

The U.S. and the EU will also hold an important meeting on Thursday.

Defense ministers from all 32 NATO member countries are gathering in the Belgian capital to prepare for an important summit later this month. The outcome of the meeting is likely to be a commitment to increase military spending to 5% of GDP—as Trump has demanded—which will impact the entire eurozone economy.

Germany's new Chancellor Merz has expressed support for this initiative and will meet with Trump at the White House on Thursday.

U.S. policy and geopolitics pose the greatest risks to the eurozone economy.

Lagarde may face questions about how the European Central Bank plans to collaborate with Slovak central bank governor Peter Kazimir. Kazimir was convicted of bribery last week and plans to appeal. According to insiders, policymakers are prepared to refrain from commenting until the proceedings are concluded.

Lagarde's personal future may also become a hot topic, as media reports suggest she is considering leaving early to chair the World Economic Forum. A spokesperson stated that Lagarde is "determined to complete her term," but this has not quelled such rumors