European bonds and stocks rose, led by Spain and Italy. The euro strengthened, oil prices surged due to U.S. sanctions on Iran and OPEC output cuts.

European bond prices advanced over the week, buoyed by the European Central Bank’s recent interest rate cuts. Equity markets also posted gains, with Spain and Italy outperforming, each rising by nearly 5%. The euro appreciated by 0.17% against the US dollar. The euro-dollar exchange rate—arguably the most significant price in global markets—was influenced by escalating trade tensions following the latest round of tariffs imposed by the Trump administration, pushing the dollar to a three-year low against the euro. Meanwhile, Brent crude prices climbed 5.05%, driven by the reintroduction of US sanctions on Iran and OPEC's decision to reduce output in response to persistent oversupply.

The ECB cut rates by 25 basis points to 2.25% due to disinflationary pressures and trade tensions. Eurozone industrial production rose, but challenges remain, limiting sustained recovery prospects.

The European Central Bank (ECB) reduced its policy interest rate by 25 basis points to 2.25%, responding to rising disinflationary pressures, trade tensions, and a strong euro. The ECB's move reflects concerns over weakening growth and inflation expectations in the Eurozone. Despite previous signals towards neutral rates, the bank now focuses on preventing further disinflation. ECB President Christine Lagarde highlighted the risks to growth, aggravated by trade disputes and fiscal changes in Germany. While the bank considered a 50-basis point cut, it opted for a smaller reduction, indicating flexibility amid uncertainties. Further cuts are possible if conditions worsen. Meanwhile, industrial production in the Eurozone rose 1.1% in February, supporting Q1 GDP growth. However, the recovery is uneven, with weaker momentum and external challenges, such as the trade conflict and U.S. tariffs, threatening demand for European goods. A sustained recovery remains uncertain, and the February rebound may only reflect short-term recovery from a weak 2024.

The ECB cut rates by 25bp to 2.25% amid rising disinflationary pressures, trade tensions, and a strong euro, signalling further cuts may follow if risks persist.

The European Central Bank (ECB) has made a decisive move, cutting its policy interest rate by 25 basis points, bringing the deposit rate to 2.25%. This reduction reflects mounting disinflationary pressures stemming from several factors, including heightened global trade tensions and a stronger euro. With these ongoing challenges, the ECB’s cautious approach towards rate adjustments has evolved into a more urgent need to ensure the Eurozone’s economic stability. Although the central bank had previously been moving towards neutral rates, it now appears focused on preventing the disinflationary effects from escalating further. This policy shift comes amid increased uncertainty, with the ECB’s decision highlighting the growing risks to both growth and inflation expectations in the region.

At the press conference, President Christine Lagarde acknowledged the rising risks to the Eurozone’s growth outlook, which have been exacerbated by the ongoing trade disputes and the unexpected shifts in German fiscal policy. Despite prior concerns, including potential fallout from the U.S. tariffs, the current economic environment has proven more volatile than anticipated. The trade-weighted euro exchange rate, reaching record highs, has further deepened the disinflationary pressures in the region. While the debate over a 50-basis point rate cut was considered, the Governing Council opted for a 25-basis point reduction, signalling a more cautious approach amid high uncertainty. Lagarde stressed the importance of maintaining flexibility and agility in the face of unpredictable developments, indicating that further rate cuts are likely if conditions do not improve. Additionally, she urged Eurozone governments to act on critical long-term projects, such as improving competitiveness and advancing capital market reforms, to support sustainable growth.

We anticipate further rate cuts due to ongoing economic weakness, potentially worsened by the trade war, and lower-than-expected inflation, now at 2.2%, close to the ECB's target.

Eurozone industrial production rose again in February, boosting Q1 GDP prospects, but weak momentum and rising trade tensions cloud hopes for a sustained recovery.

Eurozone industrial production rose by 1.1% in February, marking the second consecutive monthly increase and pushing output to its highest level since December 2023—offering some support to first-quarter GDP growth. This improvement follows a 3% rise in January and reflects a short-term rebound from the sluggish performance that characterised much of 2024. However, the growth remains uneven, largely driven by a rise in nondurable consumer goods, while other sectors, such as capital and intermediate goods, showed only marginal or no improvement. Among member states, most large economies posted modest gains, though Ireland stood out with a sharp increase—once again highlighting the volatility of its data. Despite this encouraging headline figure, the underlying momentum remains weak, as recent industrial surveys point to only a gradual easing of contraction rather than a strong rebound. Moreover, the external environment poses significant challenges: the escalating trade conflict between major global economies and the reintroduction of tariffs—such as the recent 10% U.S. levy on Eurozone exports—threaten to weigh on demand for European industrial goods. Given the Eurozone’s reliance on global trade and its sensitivity to geopolitical tensions, the February data may offer little more than a temporary respite rather than a signal of a sustained industrial recovery.

We expect a slight recovery, driven by significant weakness in 2024, making this rebound a natural consequence after the struggles of the previous year.