Will the European Central Bank cut interest rates more significantly? Bond giant Pimco: Because U.S. tariffs have been "underestimated"

Despite most analysts leaning towards a "gradual" interest rate cut of 25 basis points by the European Central Bank (ECB) this week, some analysts do not rule out the possibility of a significant cut of 50 basis points in the future.

Recently, bond giant Pacific Investment Management Company (Pimco) warned that Trump's potential tariff policies could lead to a significant reduction in Eurozone interest rates, possibly even to emergency levels.

Pimco's Chief Investment Officer for Global Fixed Income, Andrew Balls, stated in an interview with the Financial Times that he expects the U.S. to raise tariffs multiple times, which is a policy that Trump has repeatedly emphasized during his campaign.

Balls believes that in the face of the EU's economic difficulties, the ECB may have to adopt more aggressive monetary easing policies to alleviate economic pressure.

"The worst trade situation will be difficult for Europe. I tend to think our pricing is on a fairly benign path."

Pimco: The market underestimates tariffs, and the ECB may significantly cut rates

Trump's "America First" policy has put pressure on European assets. Since the end of September, the euro has depreciated significantly by over 5% against the dollar, currently around 1.05 dollars. Some viewpoints suggest that to cope with the export pressures brought by U.S. policies, the ECB will have to adopt more aggressive rate cuts.

Swap market traders are currently betting that the ECB's deposit rate will gradually decrease from the current 3.25% to 1.75%, after which the central bank will stop cutting rates.

However, Balls believes the ECB may take further action and expects the euro to depreciate further against the dollar:

"If worse-than-expected outcomes occur, meaning the ECB will adopt a more urgent policy rate level, it will be easy to lower the terminal rate."

Although Balls holds a pessimistic view on the Eurozone's economic outlook, he believes that French government debt will not deteriorate further. French government debt has been shaken by a recent budget crisis, leading to the collapse of Michel Barnier's government.

He emphasized that there has been no "contagion" effect in other Eurozone markets, indicating that the French crisis is unlikely to evolve into a systemic risk. Balls concluded:

"We have gone through various trials, including wars, pandemics, political turmoil in Italy, and the French budget crisis, but the European market remains resilient."

A 50 basis point rate cut is on the negotiation table

Currently, the inflation rate in Europe has fallen below 2%, and economic activity in the Eurozone is close to stagnation. ECB Governing Council member Francois Villeroy de Galhau also urged his colleagues to retain sufficient flexibility in the extent of rate cuts.

The ECB will hold a meeting in Frankfurt on November 11-12. Governing Council member Martins Kazaks stated last week that officials "will certainly discuss this issue (50 basis point rate cut)," but he also warned that uncertainty "remains very high." However, some analysts still choose to remain cautious. Christian Keller, head of economic research at Barclays, stated:

"I am almost inclined to rule out the possibility of a 50 basis point rate cut in December, even though the market still sees a chance. This possibility rises in the first quarter, but currently most signals point to the European Central Bank continuing to cut rates gradually."

Jordan Rochester, head of macro strategy at Mizuho, believes that the economic situation will make a 50 basis point cut a topic of discussion, but given the European Central Bank's past emphasis on the inflation process and 'conservatism,' a 25 basis point cut may be the final outcome.