Gediminas Šimkus, a member of the European Central Bank (ECB) Governing Council, stated on Tuesday that a 25 basis points rate cut is necessary in April. He noted that recent US tariff announcements prompt the need for a more accommodative monetary policy.
The current policy is viewed as more restrictive rather than neutral, with potential deflationary effects from worsening trade tensions. Even with a rate cut, the rates would remain at the upper bound of a neutral interval.
Risk of Undershooting Targets
Šimkus expressed that the risk of undershooting targets is increasing, advising close monitoring ahead of the April decision. He indicated that discussions around a 50 basis points cut would be excessive.
ECB Vice President Luis de Guindos commented on the present climate of anxiety and uncertainty. Following these statements, the EUR/USD pair retreated to around 1.0900.
The ECB manages monetary policy for the Eurozone, setting interest rates to maintain price stability targeting around 2% inflation. Interest rates typically affect the Euro’s value, with higher rates usually strengthening the currency.
Quantitative Easing (QE) allows the ECB to purchase assets to inject money into the economy, which generally weakens the Euro. Conversely, Quantitative Tightening (QT) occurs post-QE during economic recovery, positively impacting the Euro’s strength.
Šimkus made it quite clear: the current rate settings are too tight given the direction of inflation and the broader economic environment. When referencing the need for a 25 basis points cut in April, we can interpret this not as a signal of panic, but rather as a pre-emptive step to prevent inflation from falling too far below target. It’s an effort to gently realign policy rather than accelerate any fundamental change.
He raised concerns about recent trade developments, particularly from across the Atlantic. These serve as a headwind. The stance taken implies that tariffs might dampen demand and push inflation lower, forcing policymakers to act in advance to reduce pressure. If tension between major economies persists, it would be logical to expect central banks to lean further into easing to counteract expected drag. As such, we find it prudent to continue assessing tariff activity as a price driver, not just noise.
Šimkus also pointed to the current policy rate sitting near the upper edge of what is considered balanced. That’s important. Even with a small move downward, we’d still be positioned in relatively restrictive territory. Cutting now may not spark inflation or push the Euro weaker overnight, but it does begin calibrating expectations back towards a less aggressive path.
Speculation on Rate Cuts
He also dismissed the notion of slicing 50 basis points as overdone. That helps frame the corridor within which short-term speculations’ll operate. More than 25 may be seen as unlikely barring a steeper downturn in inflation readings or external shocks. From our angle, this does set a soft ceiling on how far one might price rate cuts in the near term. Beneath the words is a clear guidepost.
De Guindos spoke more broadly, but his reference to anxiety and uncertainty needs to be acknowledged. It isn’t just temperament – it’s volatility in data, markets, and expectations. This puts further weight on any upcoming communication, since traders now move quickly to adjust even on minor tone shifts from ECB members. Watching press releases and member interviews remains essential, especially if the focus is to anticipate how pricing may shift post-April.
Looking at the latest reaction in the EUR/USD pair, we saw some pressure shortly after these comments – nudging the pair down toward 1.0900. That alone speaks volumes. Whenever comments around loosening policy emerge, the Euro often responds with weakness, particularly against the backdrop of a contrasting US stance.
We know that the Euro’s strength ties directly to rate expectations. Lower yields on European assets reduce investor interest compared to their American counterparts. If the ECB starts to lean further into accommodation while the Federal Reserve stays on hold or delays its own cuts, that divergence in paths will widen. Positioning should reflect that.
It’s useful to remember how core tools like QE and QT have worked in previous cycles. When the ECB buys assets, flooding the system with liquidity, the Euro tends to weaken. Less tightening or a softer forward outlook can generate similar effects by implying that QE’s shadow continues to linger. We don’t expect fresh asset programmes, but if inflation slides sharply, these may re-enter conversation quicker than previously forecast.
QT, on the other hand, acts as a withdrawal of fuel. As it’s been progressing post-pandemic, we’ve seen gradual support for the Euro. If the ECB shifts tone, we could expect those tightening projections to be slowed or staggered. A trader might interpret that as a softening of support, potentially adding pressure to the currency.
Looking ahead, market reaction around inflation releases and trade figures will be especially telling. If inflation continues to inch lower or flatlines, we would expect further pricing of a June cut, or even a pace beyond the one mentioned by Šimkus. Option markets may begin to see wider ranges around ECB dates, making them more active periods for volatility plays.
At this point, rate expectations remain the clearest driver. Every speech and data point between now and April will feed into the calculus – not just on whether a cut is coming, but how deeply the ECB is willing to go through the summer.
