Comments by Michael Krautzberger, Global CIO Fixed Income at AllianzGI, ahead of the ECB meeting on 5 June
- We expect the European Central Bank to cut rates by 25 basis points at its 5th June meeting, its eighth cut in this cycle, taking the deposit rate to 2.0%.
- Fears about a global trade war have diminished since the April policy meeting, but trade tensions remain; meanwhile, Euro area survey data still suggests sluggish economic activity and easing inflationary pressures in the region. We think the ECB will remain sensitive to downside growth risks in its June policy statement.
- We expect short-term interest rate markets to continue pricing a terminal policy rate in the 1.5% to 2.0% range over the very near term given the growth risks, although we think we are getting closer to the end of the ECB easing cycle.
- We favour yield curve steepeners in this macro and policy environment. In FX, we think that the US dollar is facing structural headwinds; as such, despite the downside risks to the global (and European) growth outlook, we have a bias to build a short US dollar position into portfolios – we are currently long Euro versus the US dollar.
Euro area GDP growth data indicate that the region grew by 0.3%1 q/q (+1.2% y/y) in Q1, similar to that at the end of 2024, as export demand held up in Q1 ahead of expected US tariff announcements in April. The market consensus for Euro area real GDP growth for 2025 currently stands at a sub-trend 0.9%, broadly in line with growth in 2024. One of the key reasons for such modest growth expectations in the region, despite easy monetary and fiscal policy, is the uncertainty being generated by US tariff policy.
The new US administration announced its first set of sectoral tariffs on EU goods in February, followed by reciprocal tariffs set at 20% for EU goods in April. It then announced a 90-day pause on the reciprocal tariffs, leaving a 10% minimum portion in place to early July. EU-US trade negotiations are ongoing, but the European Commission has indicated that it is prepared to respond with its own tariffs if the US persists with its current policy stance or seeks to escalate trade tensions (as President Trump signalled recently with his recommendation of a 50% tariff on EU goods starting in June – which was then withdrawn). Given this uncertain trade policy backdrop, we expect this to be a key downside growth risk for the region over the coming months.
On the inflation front, headline and core Euro area CPI inflation is hovering around 2.2% and 2.7% y/y, respectively, close to the ECB target. Wage pressures continue to cool, with negotiated wages in the region rising by just 2.4% y/y in Q1, from a peak of 5.4% last year. The data re-enforce the improving inflation outlook already evident in the region, which has also been helped by the disinflationary impulse from Chinese goods entering the Euro area, lower energy prices and the appreciation of the Euro.
Following the last rate cut in April, some ECB members have been signalling a more cautious policy approach ahead. Market focus for the June ECB meeting will therefore be on the latest staff macroeconomic projections for any signals on future policy. In the short term, the risks are skewed towards a further lowering of the deposit rate, especially if we see an escalation in the trade war between the US and EU. However, we could be approaching the end of the ECB easing cycle. In H2, we may see the market begin to shift its focus away from tariffs towards the deployment of the German fiscal package and its implications for the European growth outlook beyond 2025.
From a strategy perspective, we remain convicted in yield curve steepeners in the current macro and policy environment, although we prefer to trade tactically around our core views. In FX, we favour a short US dollar bias in portfolios.
