### ECB Poised for Another Rate Cut Amid Calls for a Strategic Pause

The European Central Bank (ECB) is on the verge of reducing interest rates once more this Thursday, while leaving the door open for future adjustments. This decision comes after seven consecutive rate cuts over the past 13 months, aimed at stimulating a eurozone economy that has been under pressure even before the added complications of fluctuating U.S. economic and trade policies.

Current inflation levels have settled near the ECB's 2% target, and a rate cut has been widely signaled by various policymakers, making Thursday's anticipated move relatively straightforward. However, the spotlight will be on ECB President Christine Lagarde and the guidance she will provide regarding future monetary policy.

Market analysts are already forecasting a likely pause in rate cuts as early as July, a sentiment echoed by some conservative ECB officials. These policymakers suggest a temporary halt to reassess the economic impacts of both domestic and international uncertainties and policy shifts.

Deutsche Bank analysts have noted that securing agreement from the more cautious members of the central bank for another rate cut in June might necessitate an indication of "conditional patience." This would imply a willingness to pause further easing in July, waiting until September for any additional action, contingent on the absence of major economic disruptions.

The argument for a pause hinges on the distinctly different short- and medium-term economic projections for the 20-country currency bloc, which could necessitate varying policy responses. While short-term inflation might dip below the ECB's target, longer-term factors such as increased spending and higher trade barriers could elevate price pressures.

Adding complexity, the effects of monetary policy generally manifest with a 12-to-18 month delay. Current support measures might end up aiding an economy that might not require it by the time the impact is felt. A rate reduction on Thursday would bring the deposit rate to 2.0%, deemed "neutral" by the ECB—not restrictive, but not stimulative either.

In light of recent economic conditions, the ECB is expected to lower both growth and inflation forecasts for the coming year. The ongoing U.S. trade war has already taken a toll on economic performance and is likely to continue having a lingering effect, regardless of resolution terms, harming business confidence and investment.

Economic analysts like Sandra Horsfield from Investec emphasize that the current high level of tariff uncertainty discourages firms from making long-term investment and hiring decisions, contributing to near-term disinflationary pressures. Some economists predict that inflation may fall below the ECB's target next year, recalling the previous decade's repeated failure to hit growth goals.

The longer-term outlook, however, differs significantly. Any permanent U.S. tariffs could prompt EU retaliation, increasing international trade costs. Companies might also modify their operations to bypass trade barriers, potentially raising corporate value chain costs. Additionally, higher defense spending in Europe, particularly in Germany, coupled with green transition costs and a diminishing workforce, could sustain wage and inflation pressures.

Reinhard Cluse, an economist at UBS, suggests that the ECB's window for rate cuts may close by late summer. He warns that by late 2026, the ECB might need to hike rates again to counteract rising inflation pressures expected in 2027, amid a tight labor market during the eurozone's demographic transition.