Market Update - ECB cuts policy rates, as trade uncertainty poses risks to growth

Highlights: The ECB delivered a 25bps rate cut and removed the word “restrictive” from its press statement, having lowered the deposit rate by a total of 175bps since last June. Ms Lagarde highlighted some resilience in manufacturing and employment data, however also noted that downside risks to growth persist given the extraordinary level of uncertainty from tariff announcements. Although it can also impact inflation expectations, the ECB explained how market based indicators are still pointing towards the 2 per cent target being achieved on a sustainable basis.

• Even though the policy rate is now in the upper bound of the recently estimated ‘neutral rate’ of 1.75 per cent - 2.25 per cent range, Ms Lagarde downplayed this by stating that this assumes a “shock free” world, which is currently not the case. We now expect a further interest rate cut to be delivered in the June meeting, as weaker confidence and sentiment surveys could lower the appetite for companies to invest and consumers to spend. The market has in fact raised the probability of a rate cut in June to 94 per cent (from 75 per cent prior to the meeting), and pencils in a total of 2.6 cuts by year end. EUR was little changed on the day, whereas equities trimmed losses after the meeting
• We recently upgraded German and Eurozone equities to a mild overweight, as we believe geographical rotation from the US is likely to continue – yet highlight our global equity positioning is neutral. Policy support from the Eurozone could stem some of the economic risks, as could the desire to support tariff exposed sectors and speed up reforms. In the short term however, price action may remain sensitive to trade announcements, as additional sectoral tariffs still linger – and there has been limited progress on bilateral negotiations. We expect EUR to strengthen further against USD and reach 1.15 levels as policy uncertainty seems to weigh more on the DXY index. We maintain an overweight view on Eurozone government bonds and IG credit, focusing on 7-10 year maturities