Inflation cooling down vs. the shadow of tariffs! The European Central Bank faces a dilemma, will it pause interest rate cuts in April?

As European Central Bank officials weigh whether to further cut interest rates, inflation in the euro area continues to fall further away from the ECB's 2% target. Data released on Tuesday showed that the euro area's March CPI rose by 2.2% year-on-year, in line with market expectations, lower than the previous value of 2.3%; the core CPI in March rose by 2.4% year-on-year, lower than market expectations of 2.5% and the previous value of 2.6%. At the same time, the service sector inflation closely monitored by policymakers fell from 3.7% to 3.4%. Spanish Central Bank Governor Jose Luis Escriva stated that the latest CPI data "strengthens the disinflation process we are in, bringing us closer to the price stability target of 2%." It is worth mentioning that the latest quarterly forecast from the ECB shows that prices will sustainably recover to their target level by early 2026. The ECB's next interest rate meeting will be held in two weeks. Central bank officials must decide during this time whether to implement the seventh interest rate cut since June last year, with disagreements over how much of a threat US President Trump's tariff measures pose to euro area prices. Reports have suggested that several ECB officials are hesitant about whether to cut interest rates again. On Monday, market expectations for further monetary policy easing from the ECB this year diminished. Investors now estimate a 70% likelihood that the ECB will cut rates again in April, down from the previous 85%. Although the outlook may become clearer after Trump announces major tariff measures on Wednesday, ECB officials still need to assess the impact of increased European defense spending and large-scale infrastructure investments in Germany on the economies of euro area countries. Jamie Rush, Chief Economist for Bloomberg Economics in Europe, said, "Overall, the inflation rate is expected to fall to 2%. The speed of the decline in potential inflation rates seems to be faster than expected, with interest rates nearing neutral levels. Our view is that the ECB will pause rate hikes in April for an assessment. This appears to be what some officials are hoping for." However, he added, "The decline in service sector inflation, Trump's tariffs on imported cars, and the possibility of more tariff measures being introduced soon, suggest that the likelihood of an ECB rate cut is increasing." ECB President Lagarde stated that US tariff policies could lead to a 0.3% decline in the euro area's gross domestic product (GDP) in the first year, and if Europe takes retaliatory measures, the euro area's GDP could drop by 0.5%. In addition, regarding the risk of the tariff dispute pushing up European inflation, Lagarde stated that the ECB would be cautious, but in the short term, a weaker euro exchange rate could accelerate inflation by about 0.5 percentage points. However, not all ECB officials agree with this view. Some officials, including French Central Bank Governor Francois Villeroy de Galhau, downplay the impact of tariffs on inflation, expressing more concern about the impact on the euro area economy.