3 factors threaten the cost of money in Europe

There are three factors threatening the cost of borrowing in the Eurozone and therefore risk putting downward pressure on the bloc’s interest rates set by Christine Lagarde’s ECB more than the institution itself expected, which for now has apparently decided to maintain its current policy stance, convinced it is in a good position.

At first glance, a potential rate drop wouldn’t be bad news for Eurozone citizens: far from it, given that variable-rate mortgage payments and financing costs would further decrease. It’s no coincidence that the dovish camp hoping for more decisive action on the cost of borrowing from Lagarde is decidedly crowded, despite the eight interest rate reductions the European Central Bank announced between June 6, 2024, and June 5, 2025.

That said, a steeper rate drop than the ECB had anticipated and than markets and experts had calculated would not be positive at all, if it reflected a policy intervention, necessary to shield the Eurozone from the threat of disinflation, at risk of becoming deflation.

Disinflationary pressures are certainly not synonymous with GDP growth, which is typically associated with a healthy economy. And Mario Pietrunti, Senior European Economist at BNP Paribas Asset Management, spoke with Money.it about disinflationary pressures, identifying three factors that risk triggering them over the next few quarters.

ECB, is Lagarde too confident about interest rates? "The disinflationary process is complete."

For now, Christine Lagarde’s ECB is confident, and Lagarde seems even more focused on the threat of inflation—counting on the effects of Merz’s Germany’s fiscal bazooka and the increased defense spending the European Union is banking on—than on the danger of disinflation. This specter, according to several economists, could materialize with the slowdown in economic fundamentals, struggling with Trump’s tariffs.

A specter that Lagarde wouldn’t even see, since, at the last ECB Day on September 11, 2025, while admitting that "a stronger euro could lower inflation more than expected," she emphasized that "inflation is where we want it to be" and that "the domestic market is showing resilience."

The Eurotower’s head also said that, in her opinion, the disinflationary process is over, despite those who have been calling on her, for some time now, to even unleash a bazooka, as time is running out. And despite those who fear that the US Federal Reserve is playing with fire.

While avoiding raising specific warnings, Pietrunti of BNP Paribas Asset Management noted that at its latest monetary policy meeting, "the ECB reiterated its intention not to make further rate adjustments unless the macroeconomic environment deteriorates rapidly." He identified three factors that risk further lowering euro area interest rates, putting downward pressure on borrowing costs. This is particularly bad news for the bloc’s banks, which have benefited from a period of structurally higher interest rates for several years (and have already begun to feel the effects of the interest rate cuts initiated by the Eurotower with the start of the monetary easing phase in June 2024).

BNP Paribas presents the three factors that could trigger new inflationary pressures. More ECB cuts on the horizon

The three factors presented by Pietrunti are as follows:

• The Super Euro.
• The possibility that the euro area market will end up being flooded with Chinese products, due to the tariffs the Trump administration has imposed on goods the United States imports from China.
• Weakening wages.

The BNP Paribas economist writes: "In our view, the appreciation of the euro, increased imports from China driven by US tariffs, and slowing wage growth will bring new disinflationary pressures in the coming quarters ."

Which means, in practice, that Pietrunti " believes it plausible that the ECB will return to further rate cuts in the second half of 2026 ."

Let’s examine why, according to Pietrunti, these three factors could trigger new deflationary pressures in the Eurozone.

Number 1 threat to the cost of money: the appreciation of the euro

The US dollar volatility triggered by the new trade policy inaugurated by Donald Trump’s second US administration resulted in a sudden surge in the euro, which has been the dominant theme of this year 2025. But the Super Euro has fueled fears of disinflationary pressures in the Eurozone, a factor that has also been highlighted by other economists and strategists.

In a recently published report on the bloc’s economic forecasts for the fourth quarter of the year, analysts at Scope Ratings noted that the euro has grown by a whopping 14% against the dollar in 2025. This factor is "leading to disinflationary dynamics," to the point that "an appreciation above the 1.20 threshold against the dollar could raise concerns about competitiveness and deflation risks."

This danger threshold is not even that far away now, considering that, on the eve of Fed Day last Wednesday, September 17, 2025, when the US Central Bank led by Chairman Jerome Powell announced the first US Fed Funds rate cut of this year, equal to 25 basis points, to a new target range of 4–4.5%, the EUR-USD ratio even shot up to $1.18785, a four-year high, proving right those, like Pietrunti, who see the currency’s rally a reason to fear a more pronounced disinflationary process in the euro area than the ECB foresees.

"A Strong Euro Isn’t What the Doctor Ordered," wrote Marc Ashworth in Bloomberg in early July, raising the threat of a single currency that’s too high not only against the US dollar but also against other currencies. He wrote clearly that, at a time when Eurozone exports are already set to suffer due to tariffs imposed by Donald Trump’s administration, a super euro would make it even more difficult to "sustain export volumes."

In short, a bad situation for Italian and Eurozone companies in general, already dealing with the slap of Trump’s tariffs: an overly strong euro would further depress exports and thus companies’ revenues, forcing them, gripped by the negative effects on their profitability, to initiate rounds of layoffs. The impact on economic fundamentals would be inevitable: rising unemployment, a slowdown in consumption and thus GDP, and a reversal in inflation.

To avoid the worst, namely deflation, the ECB would consequently be forced to cut interest rates again, dropping the cost of money.

Threat number 2: Increased imports from China driven by US tariffs

The second factor that could trigger new deflationary pressures, and thus force Lagarde to further reduce rates, according to Pietrunti is the risk of an increase in imports of Chinese products by the euro area.

Also affected by Donald Trump’s tariffs, China could decide to export more goods to Europe and other non-US markets, thus exerting downward pressure on prices.

Among others, Ecaterina Bigos, Chief Investment Officer, Asia ex-Japan, AXA IM Core also spoke about this potential phenomenon, recalling what is happening in Beijing, which is grappling with the scourge of deflation.

"China’s deflationary environment continued for the 34th consecutive month in July, with the producer price index (PPI) unchanged. Persistent PPI weakness raises concerns about excess capacity and weighs on export prices, increasing risks of export price deflation and ultimately jeopardizing growth in other manufacturing economies. While this scenario is largely tolerated, as many importers are still grappling with high inflation, it could become problematic once inflation rates return to expected ranges."

Bigos warned that "China’s persistent weakness in domestic consumption and strong manufacturing production pose enduring disinflationary risks, and a weaker renminbi could be another potential vehicle for deflation to spill over to other markets."

Recalling that "the competitiveness of Chinese exports is broad and ranges from technology to base metals," AXA IM Core’s Chief Investment Officer, Asia ex-Japan, pointed out that, "with Chinese trade increasingly redirected from the United States to European and Asian economies, the latter are becoming more susceptible to potentially greater competition from China." The consequences: a price war with natural downward pressure on prices, and the risk of greater disinflationary pressures.

Threat number 3: The moderation in wage growth. Another factor that risks eroding the cost of money

Finally, for Mario Pietrunti, a third factor that could fuel inflationary pressures is the moderation of wage growth in the euro area. This factor, like that of the Super Euro, is already present.

Wages—which, let’s remember, are an important parameter for monitoring inflation trends—are actually growing in the euro area at a slower pace than in the past.

A clear proof of this came from Christine Lagarde’s ECB, which on September 17, 2025, released the preliminary figures for the data Frankfurt monitors to monitor wage trends.

These figures showed that wage growth in the euro area in the first half of 2026 is expected to be lower than current levels and more stable.

Specifically, according to the European Central Bank, the trend in negotiated wages in the euro area will slow over the course of 2026, to an increase of less than 2% on an annual basis.

The forecast is for an increase of just 1.7% in the first half of next year, down from 2.1% in the second half of 2025 and 4.3% in the first half of this year.

This means that the inflationary pressures contributed by wage growth to inflation pressures so far will be significantly dampened, rising at a rate significantly lower than the peak of 5.2% reported at the end of 2024.

In short, according to the senior economist at BNP Paribas, there is no shortage of factors that could surprise Lagarde, prompting further ECB interest rate adjustments. All this, while doubts remain about the risk that the ECB president will ultimately underestimate this time not the threat of inflation, but precisely its opposite. This would put the entire Eurozone in trouble.

Original article published on Money.it Italy 2025-09-25 12:52:00. Original title: 3 fattori minacciano il costo del denaro in Europa