Eurozone inflation appears to be largely under control, and even if a future global trade war drives prices higher, European Central Bank (ECB) officials believed that signaling stability during uncertain times was essential, according to minutes from their April meeting.
In April, the ECB cut interest rates for the seventh time in a year, while cautioning that U.S. tariffs were likely to significantly hurt economic growth. This reinforced expectations of further rate reductions in the near future.
“Policymakers voiced greater confidence that inflation was on track to return to target levels in the medium term and that the inflation shock was close to being resolved,” the ECB stated in its meeting summary. “For now, deflationary forces were expected to prevail.”
Although a few officials noted that a global trade conflict could drive inflation up eventually, the majority supported proactive rate cuts to project stability amid heightened financial market volatility.
“They emphasized the importance of acting as a pillar of stability, building confidence without causing fresh surprises in already unstable markets,” the minutes said.
Nevertheless, some members warned that inflation risks could skew higher in the longer term, particularly as deglobalization and trade barriers drive up business costs.
“These officials gave greater weight to the idea that trade-related disruptions might ultimately prove inflationary, especially as dismantling global supply chains increases costs,” the minutes added.
There was also concern that if trade tensions ease quickly and economic momentum rebounds, the ECB’s policy easing could end up overstimulating the economy just as it’s recovering—especially with additional government spending likely to kick in.
Despite some easing in trade tensions since the April decision, ongoing uncertainty continues to dampen sentiment, with markets still pricing in a strong chance of another ECB rate cut on June 5.
Currently, investors are betting on a roughly 90% probability of a rate cut next month, with expectations of one additional cut later in the year, which would bring the ECB’s deposit rate down to 1.75%—the lower limit of its estimated neutral range, where monetary policy is neither restrictive nor stimulative.
