The market is expecting the European Central Bank (ECB) to cut interest rates by 25 basis points to 2% on June 5th. This expectation is driven by factors such as the cooling of inflation in major eurozone economies in May and the severe external trade situation. If the rate cut materializes, it will be the eighth by the ECB since June last year, with further rate cuts still on the table for later this year. Bloomberg economists predict another 25 – basis – point rate cut in September. The situation could intensify if the US imposes additional tariffs after the moratorium on “reciprocal tariffs” ends.
Inflation and Trade Concerns
It is widely predicted that the ECB will lower its inflation forecast for the eurozone. The last inflation forecast was released in March, before the US increased import tariffs on the EU and other regions. Economists believe that the additional tariffs imposed by the US will reduce demand for European goods and slow the economy. Moreover, the appreciation of the euro against the US dollar and expectations of a weak global economy have dragged down energy prices, contributing to lower inflation.
US President Trump announced on May 30 that tariffs on imported steel and aluminum would rise from 25% to 50% starting June 4. A spokesperson for the European Commission expressed strong regret and stated that the EU is prepared to implement countermeasures.
ECB Officials’ Views
Recently, ECB Executive Board member Panetta publicly stated that while the space for further interest rate cuts has narrowed, the macroeconomic outlook remains weak, and trade tensions could intensify. The outcome of trade negotiations with the US is uncertain and will significantly impact the European economy. Industries most affected by tariffs have already shown signs of declining confidence, weakened orders, and lower employment expectations.
Enhancing the Euro’s International Status
ECB President Christine Lagarde recently delivered a speech highlighting plans to enhance the euro’s international status through measures such as economic development and improved payment efficiency. Speaking in Berlin on May 26, Lagarde noted that the US dollar’s share in global foreign exchange reserves is approximately 58%, the lowest since 1994, while the euro accounts for about 20%.
Lagarde emphasized that enhancing the euro’s status requires a solid and credible geopolitical foundation for Europe. This includes a commitment to open trade, increasing the EU’s share in global trade, and strong security capabilities. The EU has the world’s most extensive network of trade agreements and is the largest trading partner for dozens of countries and regions. The ECB is also promoting the development of the digital euro to improve the efficiency of cross – border euro payments and make the euro a more attractive trade settlement currency.
Strengthening the Economic Foundation
To enhance the euro’s status, Lagarde stressed the need to consolidate the economic foundation and make Europe a preferred destination for global capital. This depends on a deeper and more liquid capital market. Despite the EU’s large savings, progress in integrating the capital market and channeling funds to promote economic growth has been limited. Lagarde also highlighted the importance of maintaining a solid legal and institutional basis to support the euro’s demand and reserve currency status.
Conclusion
The ECB’s potential rate cut on June 5th reflects its response to economic uncertainties and cooling inflation. While the space for further rate cuts may be narrowing, the weak macroeconomic outlook and trade tensions necessitate continued monetary policy adjustments. Lagarde’s vision for enhancing the euro’s international status through economic development, improved payment efficiency, and a stronger geopolitical foundation underscores the ECB’s long – term strategy. The upcoming rate cut and the broader measures to strengthen the euro’s role in the global economy highlight the ECB’s efforts to navigate current challenges and secure the euro’s future.
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