Dr Dirk Schumacher – Chief Economist of KfW

“Last doubts about a key interest rate cut by the ECB this week have been dispelled. Inflation in the eurozone falls below the two percent target in May. The strong decline in the still high service inflation is particularly significant. As wage momentum has also weakened, confidence in a sustained easing of domestic price pressure is growing. Due to lower oil prices and the stronger euro, a downward revision of headline inflation is also expected in the new staff projections. We therefore assume that a strong majority in the Governing Council of the ECB will be in favor of another cut of the deposit rate to 2%. Whether the ECB will then reduce the interest rate again depends crucially on how the tariff conflict with the USA will play out. So far, the eurozone economy seems to be weathering the unpredictable US tariff policy reasonably well and companies are not overly concerned about the outlook judging from the latest business surveys. Nevertheless, uncertainty remains high and an escalation of the trade dispute is still a clear possibility. Therefore, we expect President Lagarde to emphasize the data and scenario dependency for the next interest rate decisions and avoid any guidance regarding the next steps.”

Dr Dirk Schumacher