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Investing.com - European Central Bank policymakers may be persuaded to bring borrowing costs down below 2% in the coming months depending on the trajectory of U.S. President Donald Trump's sweeping tariff policy, analysts have said.
Markets are pricing in a 25-basis point cut to the ECB's key deposit rate at its next gathering this month, lowering the figure down to 2.25%, in response to signs of stablizing inflationary pressures and a darkening growth outlook in the Eurozone currency area.
On Wednesday, Bank of Finland governor and ECB policymaker Olli Rehn said that Trump's trade actions have exacerbated downside risks and bolstered the case for a rate reduction at the ECB's April 17 meeting.
Trump has moved to slap a broad 20% tariff on the European Union, which counts several Eurozone countries among its members, as part of his so-called "reciprocal" tariffs designed to overhaul years of perceived unfair trade practices. The EU also faces a 25% duty on steel and aluminum and cars.
In response, the EU's executive arm has said it will roll out additional levies mostly of 25% on a range of U.S. imports, including fruit, poultry, wood, motorcycles and dental floss, according to Reuters.
The ECB, however, is reportedly becoming more concerned that the bloc's economy -- which was already struggling with a period of tepid activity prior to the implementation of Trump's tariffs -- could be sharply hit by the new U.S. duties.
Writing in a note to clients, analysts at Capital Economics flagged that "higher U.S. tariffs will be a substantial drag on the Eurozone economy this year."
"We also think that the tariffs add to the downside risks to euro-zone inflation," the analysts led by Jack Allen-Reynolds said. As a result, they predicted that the ECB will slash its deposit rate from its current level of 2.5% to 1.75% "in the coming months."
Analysts at UBS led by Reinhard Cluse added that another 25-basis point reduction at the ECB's June meeting is widely anticipated. Meanwhile, "the hurdle" towards a further quarter-percentage-point cut at its July gathering that would bring the deposit rate down to 1.75% "is not very high, particularly if U.S. tariffs appear more permanent and the EU retaliates only to a limited extent," the analysts said.
However, the brokerage said this was not yet its base case.
"We first want to get a better idea how trade negotiations and potential retaliation, confidence, as well as [foreign-exchange] rates and bond yields will evolve over the coming weeks, to get a better sense of the second-round growth and inflation impact," the UBS analysts wrote.
(Reuters contributed reporting.)