The European Central Bank (ECB) is on the brink of making a significant decision regarding interest rates, with analysts and investors projecting a high likelihood of rate cuts in the coming weeks. This potential move comes in response to recent trade tensions, particularly following U.S. President Donald Trump’s announcement of sweeping tariffs, which many fear could push the European economy into a recession.

Investors are currently anticipating a 90% chance of a quarter-point reduction in interest rates at the next ECB rate-setting meeting scheduled for April 17, according to data from Bloomberg. This forecast marks an increase from the 70% likelihood noted before Trump’s tariff announcements on April 2. Furthermore, there is speculation that the ECB may implement two additional cuts before the end of 2023, with some investors even predicting a possibility of a third cut.

This forthcoming quarter-point reduction, if enacted, would mark the seventh consecutive cut in interest rates. Frederik Ducrozet, the head of macro research at Pictet Wealth Management, emphasized that such a decision has become almost inevitable, stating that any alternative would likely lead to disastrous consequences for the economy.

One of the pressing concerns among economists is whether the economic outlook could deteriorate to such an extent that the ECB may need to consider larger rate cuts to stimulate growth or implement liquidity measures to support the financial markets.

Yannis Stournaras, the governor of the Greek central bank and one of the 26 voting members of the ECB’s governing council, expressed his apprehensions in an interview with the Financial Times. He highlighted the potential risks posed by the impending trade war, which could plunge the eurozone into a significant “negative demand shock,” ultimately resulting in considerable deflationary pressures across the bloc.

Global equity markets have been reacting negatively, with a downturn persisting for the third consecutive day, compounding fears of an impending global recession. Simultaneously, oil prices have plummeted to levels not seen in four years, further illustrating the widespread trepidation among investors, while the euro has noticeably gained strength against other currencies.

Mahmood Pradhan, the global head of macro at Amundi Asset Management, articulated that the primary issue facing the world today is growth, which applies particularly to Europe. He noted that this situation overshadows concerns about inflation—an area of focus more pertinent to the United States—which is likely to lead to an easing of monetary policy in Europe.

This shift in sentiment represents a stark departure from the more hawkish expectations that prevailed following the ECB’s rate cut in March. At that time, the rate setters in Frankfurt hinted at the possibility of pausing further cuts in April, suggesting that monetary policy had become “meaningfully less restrictive.” However, the recent developments stemming from Trump’s tariff announcement have significantly darkened the economic outlook and unsettled financial markets.

The proposed universal tariffs of 20% on EU imports could inflict economic damage estimated at €750 billion on the eurozone over Trump’s four-year term, according to projections by the Cologne Institute for Economic Research. Analysts have cautioned that the negative impact of the looming trade war on euro-area growth could far overshadow any inflationary concerns.

Gilles Moëc, the group chief economist at Axa Investment Managers, remarked that the combination of a slowing real economy, declining energy prices, and a stronger euro should accelerate disinflation in Europe. He also pointed out that Chinese manufacturers, facing even higher import duties due to the tariffs, may resort to flooding European markets with their goods, potentially creating a disinflationary shock.

In an especially grim prediction, economists at Barclays forecast that the ECB could slash interest rates by half, reducing them from 2.5% to 1.25% by October. They also anticipate a return to unconventional monetary policy measures, such as bond-buying, in the latter half of the year. Barclays’ economic outlook suggests that the euro area could slide into recession as soon as the second quarter, with a recovery not expected until late 2025.

As for inflation, data from March revealed that the Eurozone’s annual inflation rate had decreased to 2.2%, which is close to the ECB’s medium-term target of 2%. In contrast, the Bank of England has been grappling with more persistent inflation issues. In the UK, consumer prices surged to an annual 2.8% in February, even as wage growth remains robust, recorded at 5.9% for the three months leading to January.

Despite these inflationary pressures, economists remain cautious, predicting that the UK might also experience economic challenges similar to those anticipated for the Eurozone, leading traders to price in another quarter-point reduction by the Bank of England during its next policy announcement on May 8.

Chancellor Rachel Reeves has cautioned that even if the UK successfully negotiates a trade deal with Trump, the broader global slowdown resulting from the trade war will inevitably weigh down the UK economy. Meanwhile, the UK’s decision to refrain from retaliating against U.S. tariffs might help mitigate the inflationary impacts that accompany such trade hostilities. James Smith, an economist at ING, noted that this restraint could prove deflationary in the long term, especially as economic growth cools and the threat of foreign dumping increases.

Financial markets are largely anticipating a rate reduction by the Bank of England during its upcoming policy meeting, moving down from the current 4.5%. Overall, market predictions suggest that more than three cuts could be implemented throughout the year.

Recently, Andrew Bailey, the governor of the Bank of England, voiced concerns regarding the escalating risks facing the UK due to U.S. tariffs. He described the direct impact of the tariffs on inflation as “ambiguous” but stressed that the risks to both the UK and global economies are considerable. Pradhan echoed this sentiment, asserting that the UK would not escape unscathed from the repercussions of a global economic downturn, despite facing somewhat lighter tariffs than the EU.

As the situation develops, it is clear that the actions of the ECB and the Bank of England will be critical in navigating the financial landscape shaped by geopolitical tensions and shifting economic conditions.