Weekly Focus – ECB nearing the end of rate cuts

We published our latest economic forecasts this week, with notable downgrade to the US outlook but relatively stable view for euro area growth. Arguing that uncertainty is exceptionally high might feel like a cliché these days, but the forecasts are naturally subject to significant tariff uncertainty. As a base case, we assume that tariffs will remain near current levels in the foreseeable future, with the US average trade-weighted tariff rate hovering around 15%. This means we think the 10% universal rate as well as the current product-specific tariffs will remain in place, but that majority of the so-called 'reciprocal tariffs' will not be reinstated. We foresee euro area GDP growth at 0.9% in 2025 (unchanged), US at 1.6% (from 2.3%) and China at 4.7% (unchanged). Read more from Nordic Outlook - Normalisation with tariff risks, 4 June.

The ECB cut its policy rates by 25bp as widely expected. Lagarde delivered a more hawkish rhetoric than markets had anticipated. She underscored that the central bank is now well positioned for the current environment, and that ECB is 'getting to the end' of its cutting cycle. Euro area inflation slowed down to 1.9% y/y in May and ECB adjusted their inflation forecast to just 1.6% for 2026, but Lagarde downplayed its significance and emphasized the shift mostly reflected lower energy prices and stronger EUR FX rate. We adjusted our ECB call and now foresee only one final rate cut in September, when previously we expected cuts in both July and September. Short-end rates ticked somewhat higher as markets pulled back their rate cut expectations as well.

Market sentiment has generally remained calm despite Trump's increased 50% steel and aluminium tariffs coming into effect this week. Equities ticked modestly higher on both sides of the Atlantic while long-end bond yields stabilized lower. EUR/USD shifted up above 1.14, and we think the persistent distrust towards the US combined with structurally slowing growth will take the cross towards 1.20 in one year's time.

Incoming macro data has been to the soft side, with both US ISM manufacturing and services indices falling short of expectations. The services index showed a concerning combination of weaker new orders yet still increasing price pressures. The stagflationary tone offers no clear guidance for the Fed. On the other side of the Pacific, China's Caixin manufacturing index also fell sharply in May to 48.3, from 50.4.

Next week will be relatively light in terms of macro data. We think US CPI inflation remained steady in May at +0.2% m/m SA in both headline and core terms. University of Michigan's preliminary June consumer sentiment survey will provide markets with clearer sense of inflation expectations. The revised May survey showed that inflation expectations had declined after the US-China trade deal was announced. From the euro area, the Sentix indicator will offer a sense of how investor confidence has evolved in early June. The indicator rebounded sharply in May following the post-liberation day plunge in April and we think there is further room for a small increase in June.

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