Further ECB rate cuts are highly likely

On Thursday, the European Central Bank (ECB) cut rates by 25 basis points to support the eurozone economy, which was weakened by the US tariffs. The euro fell in value, followed by a decline in the EU government bond yields.

According to the London Stock Exchange (LSEG) data, traders estimate the likelihood of another rate cut in June at about 75%. By the year-end, LSEG expects a 65-basis-point rate cut.

Tariffs' impact on inflation looks less obvious compared to their effect on economic growth. However, significant market fluctuations suggest further disinflation. The euro nearly equaled the dollar in January. Since early March, it has gained more than 9% to about $1.135.

Market concerns about inflation have eased. It is now close to the ECB's 2% target. However, some economists see a risk of price growth slowing to 1.6% in 2026 and to 1.8% in 2027. That's a potential headache for the ECB, which has long struggled with below-target inflation before the COVID-19 pandemic.

According to Nordea analysts, the ECB may cut the deposit rate once again to 2%. Barclays expects it to drop even to 1.25% by October.