The European Central Bank (ECB) has lowered its three key interest rates by 0.25%, effective April 23rd. The deposit facility rate, the most important to investors since it is the base banks use to remunerate their clients, will drop to 2.25%.
The main refinancing rate will be reduced to 2.40%, and the marginal lending rate will be 2.65%. This is the seventh consecutive cut.
According to the ECB, the disinflation process is progressing well. Both headline and core inflation are falling, and underlying indicators suggest inflation will sustainably reach the 2% target. Wage growth is easing, and profits are helping absorb remaining pressures.
However, rising global trade tensions and increased uncertainty dampen the euro area's growth outlook and may further tighten financial conditions. At this moment, the ECB was not considering a fixed-rate path.
Inflation falls in the Eurozone
According to a first flash estimate, European inflation fell again in March to 2.2%, down from 2.3% in February and 2.5% in the first month of the year. The driver of inflationary pressures, the price of services, recorded its weakest annual increase in almost three years in March. Energy prices also fell sharply (-1.2% month-on-month).
Overall, the March inflation figure was a positive surprise. It was below expectations but close to the European Central Bank's 2% target.
Reduced impacts of further rate cuts
A further reduction in the cost of money would be welcome. However, its impact on the European economy in the short term would be very limited. Monetary easing usually takes several quarters to revive economic activity through easier and cheaper credit.
In the foreign exchange market, lower inflation and an increased likelihood of monetary easing in April weighed on the euro's value, which fell slightly against the dollar. However, this does not change the difficult economic landscape of the euro area or fundamentally improve the economic prospects of the countries sharing the single currency.
Morale at half-mast in the Eurozone
The trade war is weighing on the morale of economic agents in the Eurozone. On the other hand, the extent of the pessimism exceeded all expectations.
The latest ZEW survey, which measures the economic sentiment of 350 financial analysts and economists about Germany, recorded its worst fall since the surprise Russian invasion of Ukraine in April 2022.
Analysts have not been so pessimistic since July 2023, when Germany's annual GDP growth fell back into negative territory. While the current economic situation has not yet deteriorated significantly, the outlook for the coming months has darkened sharply with the trade war.
While the fall was less sharp, economic sentiment for the Euro area also deteriorated sharply in April. Already very sluggish since the end of 2022, the European economy is clearly at risk of falling into recession with the trade war.
These fears have completely broken the positive stock market momentum that has been at work since January 1st in recent weeks.
Export threats will continue to rattle the Eurozone stock markets in the coming months. Therefore, we do not buy Eurozone equities as part of our portfolio strategy for this moment.
