By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) - The recent global market turmoil, triggered by U.S. President Donald Trump\'s controversial tariff policies, has significantly strengthened the argument for an imminent interest rate cut by the European Central Bank (ECB) at its upcoming meeting. Analysts suggest that the economic slowdown resulting from these tariffs, coupled with the subsequent market volatility, is likely to exert such a downward pressure on prices that it will overshadow any inflationary effects that might arise from retaliatory measures taken by the European Union (EU).

Current market forecasts indicate an expectation of nearly two rate cuts from the ECB across its next two meetings, with projections suggesting between three to four additional cuts by the end of the year. This sentiment is reflected in the decline of German bond yields, which serve as the benchmark for the eurozone. Investors are increasingly pricing in the likelihood of a recession within the bloc, necessitating monetary easing to counteract the impending economic challenges.

Although the ECB policymakers have yet to reach a consensus regarding the long-term implications of the current situation, the prevailing market conditions make a rate cut next week seem inevitable. Furthermore, interest rates could potentially decrease more significantly this year than previously anticipated, without endangering the ECB\'s inflation target of 2%. Indeed, the prevailing market volatility has raised concerns that a recession is becoming increasingly likely, prompting a shift in focus towards stimulating growth rather than merely containing inflation, which has consistently remained above the ECB\'s target for the past four years.

Frederik Ducrozet, an economist at Pictet Wealth Management, remarked, \\"They have to cut at every meeting, if only because of the uncertainty. There is no sign of increasing inflationary pressure over the longer term.\\" His comments highlight the growing consensus among economists that the ECB must take decisive action to address the economic uncertainty brought about by the tariff-induced market turmoil.

A number of influential ECB policymakers, including Pierro Cipollone, Francois Villeroy de Galhau, and Yannis Stournaras, have publicly advocated for a more accommodative monetary policy in response to the current economic conditions. Notably, there has been a lack of dissent from the usual hawkish members of the ECB, who might typically resist such measures.

Privately, several policymakers have expressed skepticism regarding the ECB\'s own estimates, which suggest that the combined effect of tariffs and the EU\'s retaliatory measures would only result in a 0.5 percentage point reduction in growth during the first year. Many believe that the actual impact could be more severe, prompting calls for urgent policy adjustments.

The market response has been telling, with significant drops in oil prices, declining yields, and lower gold prices, all indicative of rising concerns about an impending recession. This combination of market indicators suggests that sentiment is leaning toward the expectation of economic contraction.

As it stands, the EU is currently prioritizing negotiations over retaliatory actions against the U.S., aiming to resolve the situation diplomatically rather than escalating tensions further. However, some more hawkish ECB members, in private discussions, caution that the central bank may be underestimating the inflationary consequences of the tariffs. They argue that the ECB\'s projection of a short-term price effect may not capture the full extent of the economic fallout from these policies.