ECB President Christine Lagarde is due to meet Commission President Ursula von der Leyen this evening in Brussels, and while the ECB said their conversation will not touch on the Governing Council meeting this week, the threat of trade-related impacts on the economy has been a matter of mutual concern for months.
Where is ‘neutral’?
While analysts largely agree that an interest cut this week and in March are nailed on, they warned that any guidance beyond that may be premature, given uncertainty surrounding the economic outlook. By April, however, the ECB should at least have a much clearer picture of the kind of tariffs Trump will impose on Europe and whether they pose a meaningful threat to either growth or inflation.
The ECB is now openly talking about moving toward a “neutral” policy, from the restrictive one it has pursued for the last three years. However, pinpointing at what level interest rates are neutral — neither stimulating the economy nor holding it back — is an art rather than a science. The ECB estimates it could be anywhere between 1.75 percent and 2.5 percent.
ING’s global head of macro Carsten Brzeski argued that hitting the upper end of that range may prompt hawks to push for slower moves thereafter. As rates approach neutral territory, the debate is likely to become more heated. Dutch central bank chief Klaas Knot warned last week against straying into “stimulative mode.”
Similarly, Société Générale economist Anatoli Annenkov said that aggressive signals by policymakers last week may have been an attempt at “precautionary guidance ahead of potentially damaging U.S. trade policies.” But if the economy holds up, he said, the ECB may well feel “obliged to switch to quarterly rate decisions after March.”
