Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How Oil and Chinese Imports Are Stalling ECB Rate Cuts
Transcript
- Lucas: Eurozone GDP just landed at 2.1 percent annualized for the first half of the year — a solid number by any standard. But two other numbers are keeping ECB watchers up at night: import prices from China hit their highest level since 2008, and Brent crude has pushed back above ninety dollars a barrel. Luna: So the growth engine is humming, but the fuel is getting more expensive. What does that do to the ECB's rate-cut agenda? Lucas: Exactly the question. The market had been pricing in at least one more cut before year-end, probably in September. But with these two external price shocks, the Governing Council is suddenly in a very different conversation. Luna: Give me a sense of the scale — how much have Chinese import costs actually moved? Lucas: According to the latest data, the cost of goods imported from China has climbed to levels not seen since the financial crisis. A big chunk of that is the tariffs the U.S. imposed earlier this month — Trump's new global tariff — but also supply chain rerouting and higher shipping costs. The euro has been stuck around 1.14 against the dollar, so no currency buffer there. Luna: And on the oil side, we've seen Singapore tighten monetary policy in a surprise move specifically because of rising oil prices. That's a signal that this is not just a Eurozone phenomenon. Lucas: Right, it's a global input cost shock. For the ECB, the worry is that both oil and Chinese goods feed directly into producer prices and then consumer prices. Services inflation has been sticky, but goods inflation had been easing. Now that trend could reverse. Luna: So the ECB has to decide: is this a temporary spike they can look through, or does it warrant a pause — or even a hike? Lucas: If today's episode is helping you think through that question, this is actually a good moment to mention that Fexingo stays ad-free thanks to listener support. You can help keep it that way at buy me a coffee dot com slash fexingo. Luna: Yeah, it really does make a difference. And back to the ECB — the growth data actually gives them a bit of room to hold fire. The economy isn't screaming for stimulus. Lucas: Exactly. The trade-weighted dollar index has dipped slightly to 120.7, which takes a little edge off the import price pressure, but not enough. And the euro at 1.14 is actually a bit weak historically, so imported inflation is hitting harder than it would in a stronger euro environment. Luna: I remember Christine Lagarde saying at the last press conference that the ECB would be 'data dependent, not time dependent.' These new data points are testing that. Lucas: They are. And the data is coming in mixed. On one hand, GDP growth accelerated from 0.5 percent to 2.1 percent — that's a huge jump. But on the other hand, the components of that growth matter. Was it domestic demand or inventory building? If it's inventory building driven by tariff fears, that could reverse. Luna: We saw a lot of that in the second quarter — companies stockpiling ahead of the Trump tariffs. Episode 136 we covered that. So that boost might be temporary. Lucas: Right. So the ECB can't just look at the top-line number and feel comfortable. They have to weigh the risk of re-igniting inflation against the risk of stifling what might be a fragile recovery. Luna: What's the market pricing now? Are they still expecting a cut? Lucas: As of this week, swaps are pricing about a 60 percent chance of a September cut. That's down from 80 percent a month ago. So the odds are shifting, but the market still leans toward easing. Luna: Sixty percent isn't a slam dunk. And if oil stays above ninety and Chinese import costs stay elevated, that probability could drop further. Lucas: It could. And then you have the Fed side — Kevin Warsh at the Fed has been signaling caution with his choice of words. If the Fed holds, that also gives the ECB cover to hold. Luna: But the Fed is dealing with its own inflation pressures — the U.S. import prices also surprised to the upside. The headline about generic drug tariffs from 2028 is a longer-term issue, but it shows the administration is serious about reshaping supply chains. Lucas: That's actually a good lens for the Eurozone. The ECB's inflation problem is largely imported — energy and goods from outside the bloc. Their domestic wage-price spiral hasn't really materialized at the same scale as in the U.S. Luna: So if it's imported, monetary policy is a blunt tool. You can't lower oil prices with interest rates. Lucas: Exactly. That's the dilemma. You tighten to reduce demand, but the price shock is coming from supply. You could end up crushing growth without solving the inflation problem. Luna: Stagflation risk — low growth, high inflation — is back in the conversation. Not the 1970s version, but a milder form. Lucas: I think that's the right framing. The ECB's own staff projections probably will have to revise up their inflation forecasts for the second half of 2026. And that could delay the next cut until 2027. Luna: One thing we haven't mentioned: the eurozone's fiscal side. With the new German spending package and the EU's NextGen funds still flowing, fiscal policy is still expansionary. That pulls against monetary tightening. Lucas: Good point. The European Commission is still disbursing recovery funds, and defense spending is ramping up. So the overall policy mix is loose fiscal, tight-ish monetary — if the ECB holds. That's an interesting cocktail. Luna: If I were on the Governing Council, I'd probably want to see the August CPI print before doing anything. Lucas: And August is when we'll get the first full month of the new U.S. tariffs impacting European supply chains. So a lot will come into focus. Luna: What's your call? September cut or hold? Lucas: I lean hold. The external price data is too uncertain, and the GDP strength gives them room to wait. They'll want to see oil prices stabilize — or not — and see how import costs evolve. A cut in December is more likely, if at all. Luna: So the message for listeners: the ECB's rate path is now on hold, watch Brent and China import prices as leading indicators. Lucas: Exactly. And the trade-weighted dollar index — if it keeps falling, that helps. But for now, the eurozone is caught between strong growth and stubborn imported inflation. Luna: That makes for a challenging second half of the year. Thanks, Lucas. Lucas: Thanks, Luna. Let's see what the data brings.