Euroland Interest Rates
Appropriately for ECB meeting day, the EU occupies much of our commentary today. Ahead of their deliberations, the ECB council members were faced with an environment of sluggish growth and low energy costs and a strong EUR keeping a lid on price pressures, leading to lower inflation but leading inevitably to lower growth forecasts. Going forward, those US tariffs and likely worldwide retaliatory tariffs will lead in H2 2025 and after to increased costs of international trade and higher inflation. Chuck in the removal of the German debt brake and higher EU defence spending and as night follows day, prices will rise, inflation will rise, and interest rates instead of falling will have to rise in H2 2026. In other words, the ECB has a limited window to stimulate the EU economy which will come to an end all too soon. The target inflation rate of 2% is described as the neutral rate of inflation: no longer holding back the EU economy but not stimulating it either. Unsurprisingly, the ECB did indeed cut interest rates yesterday by 25bps but where rates go from there will depend on how the Eurozone economy performs in the light of both internal and external influences; meanwhile there will be a pause.
EUR/USD 1.1428.
EUR 21st
No not its 21st year, but the EUR is to get its 21st member probably from January 1. While Bulgaria does not seem a natural candidate to qualify economically for inclusion in the EUR – a view shared by hard right and pro Russian politicians, who claim it will lead to large price increases and a loss of Bulgarian identity – it should be remembered that Bulgaria has been lobbying to join the EUR since 2007 when it joined the EU. High historical inflation which has conveniently come down to 2.8% from 8.6% in 2023 as well as political instability have both been waived aside as obstructions to Bulgarian EUR membership in the unswerving EUR expansionary commitment and soon the Bulgarian Lev will be no more.
GBP/USD 1.3578.
USA and Germany
The end of WW2 in Europe was in 1945, but on Wednesday 20,000 residents of central Cologne, Germany were evacuated due to the discovery of 3 unexploded American bombs that have lain undetected for 80+ years. Estimates are vague but it is believed that between 75,000 and 250,000 tons of unexploded ordinance even today still lies beneath the surface in German cities. Not all of those explosives are American, of course, but Germany in 2025 feels as if it remains under attack from the USA with trade, steel and aluminium tariffs from the USA.
GBP/EUR 1.1877.