ECB well positioned to face uncertainty after | Australian Markets

The European Central Bank (ECB) has delivered its eighth coverage cut as broadly anticipated and earned itself some “leeway” to reply to “materialising trade risks”, in accordance to commentary from Principal Asset Management.

Seema Shah, Principal’s Chief Global Strategist, mentioned European inflation had signalled it was well on its approach to “stabilising towards its target” after a consecutive easing cycle totalling 200 foundation factors since June final yr.

However, Shah famous ECB President Christine Lagarde’s affirmation that extra charge cuts wouldn’t be disregarded and the central bank’s subsequent coverage strikes would a lot be depending on the evolving state of affairs of US trade coverage.

“While risks to growth remain tilted to the downside amid the ongoing trade war, several factors are keeping Eurozone growth resilient, including a solid labour market, robust balance sheets, and easing financial conditions,” she mentioned.

“A pull-forward of exercise forward of the U.S. tariffs has additionally buoyed growth in Q1 and is probably going to present some momentum by the remaining of the yr. Moreover, there have additionally been elevated indicators that inflation is probably going to stabilise and transfer nearer in the direction of the ECB’s 2% goal as wage pressures proceed to ease.

“As a end result, ECB President Lagarde has characterised that the ECB is well-positioned to navigate the uncertainties forward. While she left the door open for extra charge cuts, she acknowledged that the ECB is getting close to the tip of the financial coverage easing cycle.

“Additional rate cuts will likely depend on the evolution of the economy amid trade policy risks materialising in the months ahead, particularly with ongoing trade negotiations between the EU and the U.S. Indeed, trade policy is likely the largest source of uncertainty to policymakers currently, particularly given the erratic nature of U.S. trade policy.”

This comes because the ECB’s inflation projections have been downgraded from 1.9 per cent to 1.6 per cent in 2026, which Shah indicated was due to Europe’s low vitality costs and a robust euro.

“These projections suggest that the ECB has greater visibility and conviction on inflation reaching its 2% target on a sustained basis,” she mentioned.

“ECB growth projections have been modestly downgraded for 2026, with GDP anticipated to grow 1.1%, barely down from the earlier 1.2%, as trade coverage uncertainty is probably going to additional weigh on financial exercise.

“However, the fiscal spending boost—particularly on defence and infrastructure—should provide significant stimulus to offset the negative impact of tariffs and support growth going forward.”

Shah additionally warned buyers to stay cautious amid persisting geopolitical volatility and uncertainty, and to deal with the ECB’s current “encouraging signs” with a grain of salt.

“With financial exercise holding up higher than anticipated, and with inflation exhibiting rising indicators of stabilizing nearer in the direction of the ECB’s goal, the central bank is in a good place to assess incoming dangers earlier than embarking on extra charge cuts.

“Investors mustn’t get too complacent with encouraging indicators from the ECB, nevertheless, as trade coverage uncertainty stays extraordinarily elevated and is probably going to proceed to drive the financial outlook and sentiment going ahead.

“Therefore, while the door remains open for additional easing from the ECB this year, they may no longer come at consecutive meetings.”