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Investing.com -- The European Central Bank delivered its seventh rate cut in a row on Thursday, but as the central bank closes in on its inflation target—lifting the bar for further cuts—Scotiabank says the risk of a trade war with the U.S. could push the ECB into deeper easing.
The ECB lowered its deposit rate by 25 basis points to 2.00%, marking its seventh consecutive cut and bringing rates to a level that policymakers now see as close to the likely endpoint for the easing cycle. “Inflation is currently at around the Governing Council’s 2% medium-term target,” the ECB said, pointing to moderating wage growth and a sustained drop in price pressures.
Updated projections show headline inflation dipping to 1.6% in 2026 before rebounding to 2% in 2027, with growth expected to remain sluggish—just 0.9% in 2025 and 1.3% in 2027.
While the ECB’s statement struck a dovish tone, President Christine Lagarde signaled that the policy cycle is nearly complete, noting the decision was “almost unanimous” and that “we have nearly concluded the policy cycle,” a message that pushed European yields and the euro higher.
Still, the ECB made clear that trade risks could change the outlook. “We wouldn’t rule out further easing were the U.S. to reimpose hefty tariffs on the E.U.,” Scotiabank (TSX:BNS) economists said, pointing to the ECB’s own scenario analysis showing that renewed tariffs could weaken growth and push inflation higher, potentially forcing the central bank to act again.
The ECB itself acknowledged, “uncertainty surrounding trade policies is anticipated to impact business investment and exports negatively, particularly in the short term,” even as increased government spending might support growth further out.
Markets are now pricing in just one more 25 basis point cut by year-end, with the possibility of deeper easing if U.S. tariffs materialize. The ECB reaffirmed its data-dependent, meeting-by-meeting approach, keeping all options open as global risks evolve.
With inflation near target and the ECB signaling a pause, the hurdle for more cuts is high—but the threat of a renewed U.S.-EU trade war could quickly lower that bar and force the ECB’s hand.