The eurozone economy continued to show resilience despite growing global uncertainty from the trade war, according to a variety of latest data released on Friday, as European Central Bank (ECB) policymakers appeared more cautious in signaling the potential for further rate cuts.
The ECB kept interest rates at their current levels on Thursday, and a slightly upbeat assessment of the eurozone economy has raised market expectations that the year-long easing cycle that has cut its key rate from 4% to 2%. This appears likely to end soon. Loan data showed the fastest pace of expansion in two years, while a key ECB survey predicted faster economic growth with inflation right on target.
Meanwhile, Germany's Ifo survey rose for the seventh straight month, a sign that the bloc's largest economy is still moving ahead despite the trade tensions hitting exports and corporate investment. The data supported ECB President Christine Lagarde's statement that the eurozone economy may have performed "slightly better" than expected last quarter.
Following these developments, investors have increasingly reduced their bets on the possibility of additional interest rate cuts. Markets now see only a 50% chance of further easing this year, a significant change from earlier in the week when another rate cut was almost certain. However, policymakers remain more cautious than investors, with the head of the French central bank, François Villeroy de Galhau, warning that risks to growth remain tilted to the downside.
Among the main concerns are slowing growth, the strength of the euro and the impact of tariffs, which could potentially reduce price pressures and endanger the ECB’s 2% inflation target. Villeroy added that US tariffs are not expected to boost inflation, and that a stronger euro is having a significant disinflationary effect. The head of the Bank of Finland, Olli Rehn, has urged that a decision not be delayed too long, stressing that waiting for uncertainty to subside under the current US administration is not a wise strategy.
Meanwhile, several major financial institutions such as Goldman Sachs, BNP Paribas, Nomura and Commerzbank have withdrawn their forecasts for additional policy easing this year.
