Victor Trokoudes comments on the European Central Bank developments

It's been widely expected that the European Central Bank ECB would cut the deposit rate by 25bps, with the central banks priority appearing to now be focusing on growth ahead of price stability, especially in light of today's disappointing figures showing the Eurozone economy stagnated in the previous quarter.

In any case, without growth, the ECB is concerned that inflation could undershoot its 2% target.

But this easing of rates could be undermined by higher bond yields. The mix of higher tariffs and lower taxes from a Trump administration is expected by global markets to result in higher rates, higher inflation and a strong dollar. Treasury yields had risen accordingly, and this has pulled up yields in developed markets who compete with the US for funding, including European countries. A weaker Euro would make imports more expensive, driving up inflation which would make it harder for the ECB to cut the base rate.

Christine Lagarde will be hoping the worst of the bond yield rises is done, but if the EU finds it needs to borrow more to finance additional costs, such as President Trump's request for increased defence spending or potential US tariffs, bond yields could yet rise further. These concerns about public debt sustainability are heightened by the political instability in Germany and France. So there will have been some relief at the ECB that Trump has not announced any tariffs against the bloc yet.

Given this background, its unsurprising that the series of cuts in 2025 almost totalling 100bps predicted by the money markets is being questioned, with some now predicting maybe only 12 more cuts. But if the Eurozone economy remains weaker than predicted, deeper cuts to rates will become unavoidable.

Despite the negative noises around the Eurozone, its worth remembering the Stoxx 600 recently hit a record high. And todays cut will add a further tailwind to European equities, especially as they already trade at a significant discount relative to US companies which may be enticing for some investors.

*Victor Trokoudes, CEO and founder of Plum