🏦🇪🇺Risk In The Week: ECB March Monetary Policy Meeting

**As seen in Risk In The Week report, get access now! cablefxm.co.uk

Back in January, the ECB slashed its policy rate by 25bps to leave the margin lending facility at 3.15% and the deposit facility at 2.75%. One key headline crossing the wires was that the ECB could drop the restrictive label as soon as March, this would lower the odds of further easing below 2.0%. Since then, we have had output data from 4Q topping expectations, while high-frequency surveys have been mixed in the manufacturing and services sectors. The last batch of ECB staff projections penciled the European economy rising 1.1% in 2025 and 1.4% in 2026. Inflation was seen slowing to 2.1% in 2025 and to 1.9% in 2026.

There are key factors that will alter the ECB's outlook on both inflation and growth, from Trump trade policies, a potential end of the Ukraine war, and a ramp up in fiscal spending from Germany. However, none of these have fully materialized, and it may be too soon for the projections to reflect these dynamics.

The desk at Goldman Sachs is attempting to forecast the new fiscal package effect on the German economy, it upgraded 2025 GDP by 0.2pp to 0.2% and 2026 by 0.5pp to 1.5%. They see spillover effects into the euro area and now expect output in the EU to rise by 0.8% in 2025 and 1.3% next year. Having this in mind, Goldman Sachs strategists no longer see the ECB cutting rates in July, however, they warned near-term risks persist on potential tariffs from the Trump administration. Deutsche Bank economists said they will be focused on whether the ECB signals a pause or skip in April, and they expect the ECB to trimmed growth forecasts for 2025 and 2026.

Any sign of a pause would further support the euro, however, at 1.0800, it is now trading at fair value to the dollar, according to Scotiabank strategists.