We expect the ECB to keep the depo rate unchanged at 2.00% at its 24 July meeting, in line with consensus and market pricing. We believe the 12th July proposed Trump tariffs on EU of 30% might be the discussion point for scenario analysis in the 24th July meeting. The ECB’s scenario analysis on how US tariffs affect euro area GDP growth, published in June, did not include a 30% level. ECB staff analysed 10% and 20%, which result in a hit to euro area GDP growth of 70bp and 150bp, respectively, cumulative until end-2027. As for HICP inflation, the ECB believes it would be “contained” under 10% and 20% tariffs. Our view on HICP inflation is different, however, and we see US tariffs as disinflationary. The material hit to Euro area GDP growth will lower Euro area HICP over the medium-term and US tariffs on China will, we believe, result in Chinese goods dumping in Europe, which will add further disinflationary pressures.If we linearly upscaled the impact of 10-20% tariffs to 30%, this would suggest 210-225bp lower GDP growth cumulative by end-2027. Our own view is that final Trump tariff levels on EU will be 20% centric implying a 150 bps hit to EU GDP growth which is signficiant. Hence we believe the ECB will deliver additional 25bp rate cuts in September and December, lowering the depo rate to 1.50%. Markets, meanwhile, price only 23bp of cuts through December 2025, and 28bp of cuts by March 2026. However, we believe markets have become complacent, as even 10% tariffs would be a meaningful hit to Euro area GDP growth. In our view, the biggest risk to our call is the timing of rate cuts beyond July rather than the eventual amount. From ECB communication perspective, we do not expect the ECB to offer any guidance on the path for interest rates, instead continuing to emphasise data dependence. From a market perspective, we like to short EUR vs GBP at current levels of .8670 not only from interest rate differential point of view but also because recent macro data in UK (CPI & employment data this week) showed UK economy is holding up well compared to EU where tariffs can significantly slow down most of the economic activities. We see EURGBP eventually going to .83 levels by early Oct’25. Stop to this view is .88. We also like to remain received on 2yr ESTR at current levels of 1.75 with the view that market is complacent on pricing only 23 bps of cut for REMCY25. We see 2yr ESTR falling to 1.5 levels by end Oct’25 as 50 bps cuts gets priced in. Stop to this view is 1.90.
