Lagarde’s Data Dance: ECB Cuts, But Future Unclear

The European Central Bank (ECB) has announced a 25 basis point reduction in its policy rate, bringing the deposit rate to 2.50%. This decision signals a shift in the ECB’s assessment of its monetary policy, with the central bank now viewing its stance as “becoming meaningfully less restrictive.” This suggests that the current rate level is perceived to be closer to the terminal rate than previously anticipated.

Despite ongoing progress in disinflation, the Eurozone economy continues to face challenges. The ECB’s staff projections have revised downward the growth forecasts for 2025 and 2026, indicating a more cautious outlook. Specifically, growth is now projected at 0.9% for 2025 and 1.2% for 2026. While inflation forecasts for 2025 have been revised upward slightly to 2.3%, primarily due to energy price adjustments, this is not necessarily seen as a hawkish signal. Notably, core inflation projections have been revised downward to 2.2%.

In a press conference following the decision, Lagarde emphasized the high degree of uncertainty surrounding the economic outlook, stressing that the ECB’s data-dependent approach is more crucial than ever.

Consequently, no firm guidance or commitment was given regarding future rate cuts. The decision to cut rates was reached by consensus, though one member abstained. Market expectations for further ECB rate cuts have been adjusted in recent days, influenced by factors such as changes in Germany’s fiscal position.

Current market pricing reflects expectations of almost two additional rate cuts by the end of the year, a slight decrease compared to earlier in the week.