ECB – All quiet on the inflation front?

The ECB is likely to lower its deposit rate again at its meeting next week – bringing it down to just two percent. It will probably justify the step with Trump's tariff increases which are burdening the Eurozone economy and, at least in the short term, lowering inflation.

Trump's tariffs lower both growth ...

At first glance, the arguments for lower policy rates are clear. The announcement of high US tariffs in early April was a shock for the global economy. In the Eurozone, many companies fear that they will lose their important US business, even though Trump may not raise tariffs as much in the end. In any case, economic risks have increased significantly.

... and inflation

At the same time, Trump's tariff policy is dampening inflation risk in the Eurozone in the short term, which also justifies lower key interest rates. China is likely to try selling some of the goods that it can no longer export to the US in the Eurozone instead. The higher supply tends to lower prices. Additionally, oil prices have recently fallen massively because companies are demanding less energy due to the cooling economy caused by tariffs, and OPEC countries are producing more oil in a bid for market share. Finally, Trump's tariff plans have also weakened the dollar. The corresponding appreciation of the euro makes imports cheaper – and further dampens inflation. In the short term, inflation in the Eurozone is likely to fall towards the ECB’s target of two percent. With a bit of luck, it could even be below it in July.

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