The European Central Bank (ECB) has dropped its three key interest rates at 25 basic points at the meeting held this Thursday, as planned, in fear that the US trade war cools to the European economy until it takes it to the recession. It is the seventh decrease of the bearish cycle and the sixth in a row. The big doubt is whether Lagarde will open the door to continue going down types in the subsequent press conference.
The BCE Governing Council reduced the rate (where banks park their excess liquidity) of 2.25%deposit, the type applicable to the main financing operations is at 2.4%and marginal credit ease at 2.65%.
“In particular, the decision to reduce the interest rate applicable to the ease of deposit is based on its updated evaluation of inflation perspectives, the dynamics of underlying inflation and the intensity of the transmission of monetary policy,” says the statement.
The ECB’s decision comes after Trump has unleashed chaos with comings and goings with tariffs. The decisions made by the US have completely changed the monetary policy board for the ECB. The agency chaired by Lagarde dismissed the March meeting with several messages in the direction that the cycle of cuts was coming to an end. Trump had not yet drawn his tariff submachine gun and the central banks were more concerned with the impact on inflation rather than something else.
The ECB indicates that the economy of the euro zone has accumulated some resilience to deal with world disturbances, but the growth prospects have deteriorated due to the increase in commercial tensions. “Greater uncertainty could reduce the trust of households and companies, and it is likely that the adverse and volatile response of markets to commercial tensions gives rise to a hardening of financing conditions, these factors could additionally ballast the economic perspectives of the euro area,” says the agency.
“The downward risks for weak growth have probably intensified after US tariff announcements, and all probability dominates concerns about possible specific increases in the price level,” explains Konstantin Ven, Pimco portfolio manager.
At a press conference, the Banquera Gala has drawn a “cloudy” horizon for the economy with a deterioration of economic perspectives, interruption of international trade and poor investment conditions because of Trump’s commercial war, but has noted that the euro zone is much more relationship than in other crises.
Meeting to meeting
The Governing Council of the ECB indicates that it has the determination to ensure that inflation is stabilized in a sustained way in its objective of 2% in the medium term, “especially in the current context of exceptional uncertainty, A data -dependent approach will apply, in which decisions are taken at each meetingto determine the appropriate guidance of monetary policy. “And explains that interest rates will be based on its assessment of inflation perspectives taking into account the new economic and financial data, the dynamics of the underlying inflation and the intensity of the transmission of monetary policy,” without compromising beforehand with any specific path of types. “
The evolution of inflation has gone to the background. The general rate in the Eurozone fell to 2.2% in March and the underlying to 2.4%, with an outstanding decrease in services, representing the bulk of the index. The recent strength of the euro against the dollar (an appreciation of 4% from the announcement of tariffs) and the decrease in crude reinforces the idea that inflation is not the current danger.
With the approach of the statement to avoid committing to new cuts, it has managed to hide the letter from whether the ECB will reach the extreme of bringing monetary policy to a accommodating area. For the jargon of central bankers it means lowering the types below the neutral types, that is, stimulating the economy with interest rates. In March, the magic phrase of the statement was “Monetary policy is adopting considerably less restrictive orientation“That is, the cuts were going to stop and that reference has disappeared from the statement.
Carsten Brzeski, Global Director of Macro in ING highlights that “what began last year in June as a very shy attempt to gradually reduce the level of restriction of monetary policy has become a race towards neutral interest rates, and there are even more cuts to come.”
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