ECB Minutes – The ECB sees potential emergence of a “new global equilibrium”

EURUSD gains after ECB minutes were released amid historic market turmoil following Trump’s April 2nd tariff bombshell. The April 16-17 meeting reveals a central bank responding to unprecedented global disruption while eurozone disinflation accelerates beyond expectations.

Disinflation Accelerating

• Headline inflation: 2.2% (vs 2.3% prior), energy turning negative at -1.0%
• Core inflation: Sharp drop to 2.4% from 2.6%, services cooling to 3.5%
• Wages moderating faster: Corporate surveys show 2025 expectations down to 3.0%
• Market pricing sub-2% inflation through 2025, falling to 1.2% by early 2026

Germany’s Fiscal Game-Changer

Debt brake reform unleashing massive defense and infrastructure spending over next decade – ECB sees this offsetting trade war damage and supporting medium-term growth.

Policy Decision: Insurance Cut

• Unanimous 25bp reduction to 2.50% deposit rate
• Dropped “restrictive” language – no longer saying policy becoming “meaningfully less restrictive”
• Some wanted 50bp given increased recession risk and financial tightening
• Meeting-by-meeting approach maintained amid “exceptional uncertainty”

Competing Forces

Near-term disinflationary:

• Trade uncertainty crushing confidence
• Euro strength and commodity collapse
• Tighter financial conditions despite rate cuts

Medium-term inflationary risks:

• German fiscal stimulus kicking in
• Potential EU retaliation on hard-to-substitute goods
• Supply chain fragmentation raising structural costs

Bottom Line

ECB delivered insurance against trade war fallout while disinflation runs ahead of forecasts. Euro strength and collapsing commodities create near-term deflation risk, justifying cuts despite concerns about medium-term inflation from fiscal expansion. Markets expect terminal rate around 1.7% by May 2026, then rate hikes resuming as structural changes reshape the economy.

The ECB sees potential emergence of a “new global equilibrium” – either temporary disruption or permanent fragmentation with higher structural inflation.

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