Aberdeen: ECB interest rate decision ends period of restrictive policy
Felix Feather, Economist at Aberdeen, comments on the ECB's interest rate decision:
'The European Central Bank (ECB) decided today to reduce its key policy rates by 0.25%, taking the deposit rate to our estimate of neutral, 2.0%. This decision marks an end to a period of restrictive policy that dates back to January 2023.
An undershoot of the ECB’s 2.0% inflation target, soft demand, and an expected negative shock to growth from US tariff policy all informed its decision to remove any remaining restriction from monetary policy. Indeed, we expect these factors to prompt the Governing Council (GC) to cut rates again in September. From here, the likeliest scenario involves just one cut, taking the deposit rate to a modestly accommodative 1.75%.
Admittedly, the ECB would move to support the economy more aggressively if US President Donald Trump’s threat of a 50% blanket tariff against the EU turns is implemented. But legal challenges on existing tariffs, ongoing progress in EU-US trade talks, and the potential impact on American consumers make this unlikely. Still, the current 10% baseline is already hurting European exporters, and this could still rise to the original 'reciprocal' rate of 20% upon the expiry of the 90-day pause in these tariffs in July.'
