Deutsche Bank Predicts 25 Basis Point ECB Rate Cut to 2.25%

Deutsche Bank has predicted that the European Central Bank (ECB) will lower interest rates by 25 basis points to 2.25% during its April meeting. This forecast comes as the ECB grapples with heightened risks of an economic downturn, prompting a shift towards a more accommodative monetary policy. The bank's previous stance in March was more cautious, but the evolving economic landscape has necessitated a change in strategy. The ECB's decision to lower interest rates is aimed at bolstering economic growth and preventing inflation expectations from declining further.

The economic risks, including the impact of tariffs, increased uncertainty, and tightening financial conditions, have proven to be more severe than initially anticipated by the ECB. Additionally, the assumption that tariffs would drive up inflation is now being challenged as deflationary forces gain prominence. Key downside risks to inflation include a rapid appreciation of the euro, falling oil prices, and the potential for increased trade diversion, all of which exert downward pressure on inflation prospects. Deutsche Bank notes that the current inflation risks are clearly skewed to the downside.

While the guidance following the tariff suspension may be mildly dovish, the ECB must remain flexible in the face of complex and evolving shocks. Deutsche Bank maintains its view that the final interest rate will settle at 1.5% and warns that the market may still be underestimating the risks of deflation. The ECB's decision to reduce interest rates reflects its commitment to supporting economic growth amidst a challenging global economic environment.