AllianzGI: ECB cuts interest rates again, but end of cycle in sight

The ECB is expected to lower interest rates by another 25 basis points, bringing the deposit rate to 2.0%. Despite declining inflation and weak growth, trade tensions between the US and the EU remain a risk. According to Michael Krautzberger, CIO Public Markets at AllianzGI, the end of the easing cycle is approaching. He expects a steeper yield curve and sees opportunities in a long position on the euro against the dollar.
The ECB meeting on 5 June is likely to result in a 25 basis point cut in interest rates. This will be the eighth cut in this cycle. The markets are counting on a policy rate of between 1.5% and 2.0%, which would bring the bottom of this cycle into view.
Threat of import tariffs persists
Although acute concerns about a global trade war have eased since April, tensions between the EU and the US remain. The temporary pause in mutual tariffs is not a structural solution. The threat of new US import tariffs on European goods continues to hang over the market. This is weighing on confidence and limiting investment appetite.
At the same time, economic activity in the eurozone remains sluggish. Recent business surveys point to weak growth, and although GDP rose by 0.3% in the first quarter, year-on-year growth remains stuck at a modest 1.2%. For 2025, consensus growth is around 0.9%, barely higher than in 2024. Uncertainty surrounding US trade tariff policy is weighing heavily on the outlook.
Focus shifts to budget and currency
As far as inflation is concerned, the signs seem to be pointing towards further easing for the time being. Headline CPI inflation stands at 2.2%, core inflation at 2.7%. Both are around the ECB's target. At the same time, wage pressure is easing: at 2.4% year-on-year in Q1, wage growth is significantly lower than last year's peak of 5.4%.
The combination of moderate growth, cooling wage pressure and declining inflation gives the ECB room to ease further. Nevertheless, some EC board members want to pursue a more cautious policy. From the summer onwards, the focus will shift from interest rate cuts to the implementation of German budgetary policy and its implications for European growth prospects.
From a strategic point of view, AllianzGI remains committed to a steepening of the yield curve. Krautzberger also sees room for a currency position in this climate: "We are building up a short position on the US dollar and are long on the euro. Despite weak growth figures, the European policy support environment offers more certainty than the uncertainty in the US."