Were it not for Trump, Lagarde’s task might be relatively straightforward. Growth is still weak, inflation still appears to be falling back toward 2 percent, and there is little in any of the data that the ECB attaches importance to, such as wage and credit growth, to stop it easing policy further.
Against such a backdrop, senior members of the Governing Council such as Bank of France Governor François Villeroy de Galhau and his Greek colleague Yannis Stournaras have confidently predicted further cuts over the rest of the year, endorsing market forecasts that see the deposit rate at 2 percent.
Analysts at Barclays said in a note to clients this week that the ECB may be forced to go even lower, if Trump proceeds with his various threats.
“Further trade-war escalation between the U.S. and the [eurozone] is likely to have notable consequences on economic activity in the euro area,” Mariano Cena and Saadalla Nadri-Yazji argued, by breaking supply chains, creating production bottlenecks, and, “most importantly, generating uncertainty, hence delaying investment and consumption decisions.”
In purely domestic terms, the picture has become slightly clearer for the ECB since its last meeting: elections in Germany have produced a clear path to a new and likely business-friendly government, while in France, Prime Minister François Bayrou has squeezed a budget through parliament without triggering fresh political instability.
Guessing game
But the best that can be said for the economy is that it has stopped getting worse in recent weeks. The latest round of real-time business surveys point to a modest improvement in the fortunes of the beleaguered manufacturing sector, while those sectors that respond most to interest rates, such as construction, are picking up slowly. However, rising unemployment is undermining consumer confidence, frustrating the ECB’s efforts to get people spending again.