ECB Watch: Not the last rate cut
As expected, the ECB Governing Council decided to cut its key interest rates again by 25bps today. The deposit rate is now at 2.75%. Furthermore, the Governing Council remains committed to its data-driven approach, does not rule out further rate cuts, but also does not comment on how many there will be. Given our view of declining (service) inflation and downside risks to the economic outlook, we expect further interest rate cuts over the next few months and see the deposit rate at 2% in June.
Euro area inflation broadly within expectations – economy faces structural downside risks
As expected, the ECB Governing Council decided to cut the key interest rates again by 25bps. The deposit rate stands at 2.75%, the main refinancing rate at 2.90% and the marginal lending rate at 3.15%. Since the start of the interest rate cuts in June last year, the deposit rate has been lowered by 125bps. And it is assumed that further rate cuts will follow. However, it remains to be seen how many there will be.
There was little change in the monetary policy statement. Key elements such as “the disinflation process is well on track” and “monetary policy remains restrictive” were kept, suggesting further interest rate cuts to come. This is because the “economy is still facing headwinds,” according to the ECB. However, the ECB has been emphasizing the downside risks to the economy for some time and today's GDP figures will further strengthen this view. The euro area economy stagnated in the fourth quarter of 2024. Although the ECB is optimistic that the "demand picks-up over time", the only marginally better PMIs at the start of the year do not necessarily suggest this and the focus rather is on "over time" From an economic perspective, we therefore see those members in the ECB Governing Council who favor further interest rate cuts as being in the driving seat. This is further supported by the fact the ECB does not seem to be irritated by inflation surprisingly slightly to the upside in December, we think rightly so.
At the press conference, Lagarde became somewhat more explicit. The ECB President once again emphasized that the current key rate level is considered restrictive. There was no discussion of the neutral interest rate, according to Lagarde. Both aspects make it clear that further rate cuts are on the horizon. Lagarde's assessment of the inflation trend can be described as optimistic, even with service price inflation still elevated. All the indicators available to the ECB point to falling wage growth in 2025, which should lead to a decline in service price inflation. Overall, however, it has to be said that the press conference did not provide any significant new information, but rather confirmed existing views.
On financial markets, interest rate markets already reacted to the disappointing GDP figures in the morning by yields coming down and the euro depreciating. This trend was reaffirmed by the ECB meeting, for FX being meddled by data on US GDP.
We do not expect today's interest rate meeting to affect our ECB forecast of three further interest rate cuts of 25bps each by June 2025.
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Franz ZOBL
Austria Franz joined Raiffeisen Research's Economics, Rates, FX team in 2020 primarily focusing on US monetary policy, benchmark yields and EUR/USD. Prior to joining RBI, he worked as a research economist in the financial sector. He holds a PhD from the London School of Economics and studied at the Vienna University of Economics, the University of Vienna as well as Tilburg University. He is a published author within the field of macroeconomics and has a passion for economic history.
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