After seven consecutive 25bp rate cuts and a total of eight and 200bp rate cuts since September 2023, the European Central Bank kept its policy interest rates on hold at today’s meeting. At the press conference, ECB president Christine Lagarde kept all options open but it looks as if the bar for more rate cuts is gradually
No changes to the ECB's macro assessment
The ECB’s macro-economic assessment has not changed since the last meeting. The ECB still sees a resilient eurozone economy, though risks to the growth outlook remain tilted to the downside. Lagarde made explicit what these downside risks were: a further escalation in global trade tensions, geopolitical tensions and a deterioriation in financial market sentiment. As regards inflation, the ECB still refrains from gauging the risk assessment. Instead, the ECB has again labelled the outlook for inflation as more uncertain than usual.
Concerns about stronger euro and inflation undershooting were downplayed
Lagarde quickly dodged any questions on the stronger euro, stressing the expected wording that the ECB had not exchange rate target and was only looking at the exchange rate as part of the transmission mechanism. Shortly after the June meeting, the stronger euro exchange rate had given rise to speculations on continuation of the current rate cut cycle in July.
As regards the potential risk of inflation undershooting, as a result of a stronger euro, Lagarde played down the risk by pointing to the fact that the ECB’s June staff projections had already predicted a minor inflation undershooting over the coming months. According to Lagarde, a minor inflation undershooting did not pose a problem as it was the medium-term outlook that mattered for monetary policy.
ECB feels comfortable in the 'good place' but one final rate cut still possible
All in all, with a deposit rate of 2%, headline inflation at 2% and an inflation outlook that fulfills the old ‘below, but close to 2%’, the ECB can simply wait for who is holding the better trade cards in the trade negotiations and whether actual inflation will really behave as predicted. Or as Christine Lagarde put it: the ECB remains data-dependent and follows a meeting-by-meeting approach, focussing on the inflation outlook and risks surrounding it, dynamics of underlying inflation and the strength of monetary policy transmission. As long as core and services inflation remain above 2% and the fiscal stimulus story in Germany and the rest of the eurozone remains intact, there is very little reason for it to leave its ‘good place’. However, if the trade tensions are resolved quickly and a lifting of uncertainty increased resilience of the eurozone economy, the debate at the ECB could quickly shift. From whether or not more rate cuts are needed to when to hike rates in order to tackle inflationary pressures stemming from fiscal stimulus.
Admittedly, taking today’s meeting at face value, the bar for yet another rate cut this year has clearly been raised. Still, we think that actual inflation could come in lower than the ECB expects and hard macro data could rather disappoint over the summer. This, together with the fact that the ECB’s June projections actually included a terminal rate of 1.75%, still encourages us to see one final rate cut at the September meeting. But our conviction has become weaker today.
Christine Lagarde did not give away any hints on what could be next for the ECB, simply reiterating in several ways that everything is possible. To give today’s ECB meeting a more entertaining note, the ECB today could have also turned on the old song by Doris Day ‘Que sera sera’. It’s the ECB’s summer theme.
