ECB April Policy Rate Preview: A 25bp Cut Locked In, the Trade Risk to Steer Market Sentiment

TradingKey - On 17 April 2025, the European Central Bank (ECB) will announce its April policy rate decision, with markets overwhelmingly pricing in a 25-basis-point cut, lowering the Deposit Facility Rate to 2.25%. This aligns with our baseline expectation.

Figure 1: Fed vs. ECB policy rate (%)

Source: Refinitiv, Tradingkey.com

In 2025Q1, the Eurozone economy trajectory remains fragile. According to Bloomberg Survey, Eurozone’s Q1 GDP growth projected to be 0.3% (annualized), much lagging behind that of the U.S.. Despite headline inflation stabilizing at 2.2% YoY in March, the ECB’s updated projections now forecast 2025 inflation at 2.3% (up from 2.1% in December 2024), signaling heightened vigilance amid U.S.-EU trade tensions.

Figure 2: Eurozone HICP (%)

Source: Refinitiv, Tradingkey.com

As a matter of fact, the ECB’s April meeting is a tactical exercise in balancing growth support against fiscal, inflation and trade risks. This necessitates a scenario-based analysis of the ECB’s monetary policy.

·           Our baseline scenario predicts a 25-basis-point rate cut, expanding the Fed-ECB policy rate spread to 2.25 percentage points. As this outcome is already priced in, limited euro (EUR/USD) and equity volatility is expected.

·           If the ECB adopts a cautious stance and keeps the policy rate unchanged at 2.50%, that will signal heightened inflation concerns, boosting the euro and spooking equities.

·           Conversely, if the ECB takes a more dovish approach—cutting rates by 50 basis points, which would show more concern over growth, weakening the euro and steepening yield curves.

Given that a 25-basis-point rate cut is the most likely outcome, the ECB’s updated economic projections and press conference could significantly influence market sentiment. Against the backdrop of global trade frictions, efforts to stabilize energy markets will help restore confidence in the European economy, potentially leading to the ECB’s monetary policy easing being moderate. Investors should brace for asymmetric volatility, with upside risks to the euro likely outweighing downside pressures.