MNI SOURCES: ECB Still Set For 2% Deposit Rate As Yields Surge

A broad majority of European Central Bank Governing Council officials see another 50 basis points in easing, taking the deposit rate to 2% under a base-case scenario, but there is no consensus over the timing of these likely two cuts, with rising bond yields and highly unpredictable U.S. trade policy complicating deliberations, Eurosystem sources told MNI.

After March’s 25bp rate reduction, the April meeting is seen as finely balanced, with some policymakers preferring to slow to a quarterly pace of easing, which would allow more time to assess uncertainties such as potentially significant disruptions from tariffs and a possible ceasefire in Ukraine, sources said.

But while inflation risks stemming from increased European military spending are seen as muted for now, news of Germany’s EUR500 billion infrastructure fund and moves to loosen EU fiscal rules to boost defence have quickly pushed up yields, particularly at the longer end of the curve. More dovish officials argue that this tightening of financial conditions and falling energy costs were not factored into the last round of ECB projections, which only saw inflation returning to the 2% target by early 2026.

Rerunning the projections now would see inflation back at target one quarter earlier, the dovish officials said, adding that this increased the chances of a cut in April. Even some banks more traditionally concerned about inflation are coming round to this view.

"I am confident that we will reach the inflation target at the end of this year and we should proceed as we are doing," said an official from a country historically known for hawkishness.

BLS DATA

The ECB’s Bank Lending Survey is due on April 15, two days before the next monetary policy decision, and will be a key gauge of the effect of tightening financial conditions.

“We obviously need to see data, but as it stands, we'd likely need to see some strong upside numbers to argue against an April cut,” one official said.

Some officials are concerned that a pause next month could be interpreted as the end of the rate-cutting cycle, making it harder to resume reductions.

"If it is clear that you are going to make a cut in April or June, why wait?" an official from a national bank said.

Others though are cautious, noting that the ECB is already close to the neutral rate, the level at which monetary policy neither stimulates nor restricts the economy. Arguments for a pause in April are split between those advocating a quarterly pace of easing and those who want to wait and assess developments. (See MNI POLICY: BOE, ECB Probe Whether QT Can Lower R-Star)

"Personally, I still think we will be at 2% by September, given what we know now and how the economy is likely to develop by then. But I think we have a number of paths to that point," one official said, adding that there is now a higher risk of stopping at 2.25% than continuing to cut to 1.75%.

An ECB spokesperson, commenting on the likelihood of reducing the deposit rate to 2%, stressed that monetary policy decisions would depend on the economy.

“The ECB President and Governing Council have clearly stated that interest-rate decisions will follow a data-dependent and meeting-by-meeting approach and that we are not committing to a particular rate path,” the spokesperson said.

U.S.TARIFFS

U.S. trade policy however is a wild card.

“On tariffs, models are all over the place depending on calibration,” said one official, who tends to a more hawkish stance, “I am not sure there will be enough info to take a firm stance. Doves saw them as negative demand shocks. Retaliation means that might very well end up being negative supply shocks.”

Nonetheless, there is consensus within the Governing Council that more policy restriction remains to be unwound, even though this restriction is “meaningfully less” than previously, with officials acknowledging that the ECB is approaching the end of the cycle. (See MNI SOURCES: ECB Likely To Tweak Language, Keep "Restrictive")

"Only true hawks believe the terminal rate is higher than the real zero published by ECB staff. So I don’t think it is going to change soon. That said, there is an infinity of paths leading to the terminal rate," one official from a traditionally hawkish bank said.