MNI SOURCES: Tariffs Make ECB More Likely To Cut In April

U.S. tariffs are tipping the scales towards a 25-basis-point rate cut by the European Central Bank on April 16, particularly after encouraging inflation data, Eurosystem sources told MNI, though they added that they remain on alert for European Union retaliation or other significant developments.

The decision ahead of the next meeting had been seen as finely balanced, with most Governing Council members expecting another two cuts over the course of this year following March's 25bp reduction, taking the deposit rate to 2% under a base-case scenario, but with little consensus over their timing. However U.S. tariffs, which will hit European exporters and potentially sap output, have combined with favourable inflation trends, adding to the arguments for an April cut under the ECB’s current data-dependent framework, sources said.

“Data dependency says that we should cut. The only reason for not doing it is uncertainty and the fact that there are still lots of things to unfold. I wouldn't say it's done, but the cut is much closer today,” one source said, speaking soon after the tariffs announcement. (See MNI SOURCES: ECB Still Set For 2% Deposit Rate As Yields Surge)

Many indicators that had previously delayed progress towards the 2% inflation target have shifted in a favourable direction. Energy prices have declined, and wage and services inflation is now starting to moderate. Flash data showed services inflation moderating to 3.4% in March from 3.7% the month before while the headline reading eased to 2.2% from 2.3%.

DATA COOPERATES

“Any new information we have had has, if anything, been supportive of a cut since the last meeting in line with our base case – or at least the projections. Inflation is lower, wages are lower and will likely be at target sooner, growth has already seen a confidence jolt, if not shock. The currency has strengthened, gas prices are lower and longer-term yields are higher,” another source said.

While several officials see the recent data as clearly pointing towards a cut, the usual dovish-versus-hawkish split may not define the debate this time. Instead, the division lies between those who believe the ECB should respond to current data and those who argue that the level of uncertainty is too high to justify a move.

“The economy is not doing well, and services inflation is finally showing signs of cooling off, but what we are hearing from Brussels with possible retaliation measures makes a pause a good option,” said one source at a national central bank who currently sees a pause as more likely, citing the risk of stagflationary spillovers from a broader trade conflict.

Another national bank official emphasised risk management arguments for a cut, even while suggesting the outcome remains “50/50.”

In contrast, many warn that delaying action until June in the hope of gaining greater clarity could be a mistake. Even without a formal EU response, some argue that the ECB must proceed on the basis of the data in hand. (See MNI POLICY: BOE, ECB Probe Whether QT Can Lower R-Star)

An ECB spokesperson declined to comment.