The tariff deadlock is easing without changing the loose stance. The European Central Bank's rate cut in June is almost certain.

Notice that European Central Bank officials are preparing to further lower interest rates, expecting that even if the Trump administration softens its stance in the coming weeks, US tariffs will still cause long-lasting damage to the economy. After a tense meeting at the International Monetary Fund (IMF) this week, most policymakers left Washington disappointed. They anticipate that Trump's unpredictable behavior will continue to fuel uncertainty, suppress spending and investments, and ultimately restrain inflation in the near future. Pressure on prices from the strengthening euro, increased fiscal spending, tightening financing conditions, and falling energy prices will further justify the 25 basis point rate cut in June. What happens thereafter will largely depend on the latest inflation forecasts for next year and beyond. The European Central Bank has already cut interest rates seven times. Economists from US Bank, Deutsche Bank, and Morgan Stanley are already predicting that the European Central Bank will lower the deposit rate (currently at 2.25%) to at least 1.5% this year to boost demand. While members of the Governing Council, such as Olli Rehn and Gediminas Simkus, have indicated their willingness to consider lowering borrowing costs to this level, others like Klaas Knot and Martins Kazaks have cautioned against being too aggressive, as the medium-term impact of recent events is still unclear. President Lagarde is essentially sticking to the official line of the European Central Bank. Last Friday, she told central bank governors at the Ministry of Finance, "When the scale and distribution of the shocks are highly uncertain, we cannot offer certainty by committing to a specific rate path." Earlier this week, she stated that the European Central Bank must "extremely rely on data." Most recent reports indicate a weak growth outlook for the future. A survey of purchasing managers shows low confidence and weak demand, leading the IMF to downgrade the Group of 20's economic growth rate for this year from the previous 1% to just 0.8%. IMF 2025 Economic Growth Forecast Slowing growth is accompanied by decreasing inflation. Like the IMF, the European Central Bank predicts that price pressures will reach 2% at some point in the second half of this year. However, their message is more hawkish compared to the information revealed by some policymakers visiting Washington from Europe. Alfred Kammer, Director of the European Department at the IMF, said last Friday that lowering rates by another 25 basis points "would suffice to achieve the 2% target." In the absence of "major shocks," he added, "we do not see the need to lower rates below 2%." Economists believe that this threshold is a neutral estimate, neither stimulating nor restricting demand. It could serve as a crucial signal, with policymakers, especially the more hawkish ones, possibly reluctant to cross this threshold. Latvia's central bank governor Kazaks remarked in an interview on Saturday, "If inflation remains significantly below the target for a prolonged period, the natural choice will be to lower rates to stimulate." "This is not the current situation." His Dutch counterpart Knot said in a speech on Wednesday that neutrality "is still broadly appropriate." While the pace of inflation slowing may be faster than previously expected, he argued that the long-term impact of trade disruptions and increased spending on defense and infrastructure in Europe "is not as clear." His remarks suggest that the European Central Bank, at its June 5 meeting (his last before the end of his term), may need to reduce its forecast for consumer price growth next year from the 1.9% predicted in March. Data for 2027 is crucial for assessing price stability over a longer period. Despite the uncertainty, some of his colleagues are almost ready to declare victory. Francois Villeroy de Galhau of France stated, "There is currently no inflation risk in Europe." His Slovak counterpart Peter Kazimir also believed that inflation would approach the target in the coming months, rather than the early 2026 as forecasted last month. According to a median estimate from a survey conducted before the release of data on Friday, April's inflation rate may drop to 2.1%. Two days ago, Eurostat is set to release preliminary estimates for the first quarter economic performance, with analysts predicting a growth rate of 0.2%. Eurozone Inflation Close to European Central Bank Target This data, along with new forecasts, will be considered in the European Central Bank's next decision. While policymakers eagerly await this data to gain insight into the future, it's unlikely to capture the entirely new balance in the trade arena. Trump's 90-day respite for negotiations will only end in early July, and it's still unclear whether a lasting agreement can be reached. Rehn, the Governor of the Bank of Finland, said in an interview, "Maintaining complete freedom of action is hugely important, meaning that we won't set certain thresholds based on assumed neutral rates, nor preclude a certain scale of rate cuts. Now is the time for flexible and proactive monetary policy." When asked about the possibility of taking larger actions, Chief Economist Philip Lane remarked, "There's no reason to say we will always take the default 25-basis-point step," though he emphasized this as a theoretical point. Others suggested that in special circumstances, such steps may not be necessary. Meanwhile, Madis Muller of Estonia said that if trade uncertainty causes greater damage to growth, policy may need to be "somewhat looser." However, not everyone is pessimistic about the economy. Boris Vujcic, Governor of the Croatian Central Bank, noted that funds are flowing into the euro area and bond yields have declined. "The current situation is not the worst for Europe."