Not the Time to Pause ECB Set to Cut as Eurozone Disinflation Gains Ground

Markets are heading into the European Central Bank’s April meeting with a clear expectation: another 25bp rate cut. After weeks of mostly dovish data and easing inflationary pressure, this move looks all but locked in. The disinflation story is gaining traction and barring any geopolitical blow-up or sharp macro reversal, the ECB seems poised to stay the course on its easing cycle.

ECB Rate Decision 

What’s changed since March? Quite a bit. While the March ECB meeting was still tinged with cautious optimism and hints that the Governing Council might consider a pause, the incoming data has shifted the tone decisively. Services inflation cooled more than expected, the euro has continued to firm on a trade-weighted basis, and confidence indicators like today’s ZEW release are flashing warning signs for future demand.

In fact, MUFG’s latest read shows a euro that's appreciated over 5.5% since March 1st. That alone could carve out 20bps from headline inflation over the coming year, assuming historical passthrough relationships hold. Meanwhile, energy and commodity prices have softened, and trade diversion effects from new US tariffs appear to be dampening price growth rather than inflaming it.

For now, the ECB’s primary concern isn’t inflation it’s managing a fragile macro environment complicated by volatile trade policy and weak consumer sentiment. While US tariffs (especially the 25% slap on selected European exports) initially raised red flags about imported inflation, EU leaders have so far avoided direct escalation. That diplomacy has helped contain FX-driven inflation risk, though it’s also left the euro vulnerable to future policy missteps.

The ECB isn’t working with fresh projections this week, so don’t expect hard forward guidance. But what we can expect is a statement that continues to emphasize flexibility and acknowledges downside risks more explicitly. The current deposit rate 2.00% sits on the upper end of what many consider ‘neutral’, and a cut would move it to 1.75%, right at the bottom of that range.

Looking further ahead, MUFG (and I agree) expects two more cuts this year after this April move. That would anchor the terminal rate at 1.75% unless the economic picture deteriorates more sharply, or wage pressures re-emerge in the second half. For now, wage dynamics are cooling, and collective bargaining outcomes aren’t signalling the kind of sticky wage growth that would keep core inflation elevated.

Interest Rate Probabilities ECB 

What’s interesting is that even with fiscal stimulus measures from Germany and potential EU-wide investment initiatives on the radar, policymakers are treating those as secondary for now. The focus is squarely on confidence and demand shocks, not government spending, which may take months to filter through the system.

One wildcard: if the EU shifts its stance on tariff retaliation or accelerates fiscal coordination efforts in Q2, the path for rates could become more non-linear. But for now, markets are comfortable pricing in a cut this week and another in June especially if the ECB revises HICP projections lower next time around.

Bottom line: Thursday night’s ECB decision is unlikely to surprise. It will be a cut, delivered with soft language and a reminder that the ECB’s job isn’t done yet. The tone may remain cautious, but the message is clear: eurozone disinflation is progressing, and the central bank intends to support that trend without overcommitting in a world still shaped by trade frictions and confidence slumps.

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