ECB cuts, as expected, but not sounding in a big hurry to cut again

As widely expected, (and signalled repeatedly by European Central Bank (ECB) speakers), the ECB cut euro area interest rates 25 basis points. The decision wasn’t quite unanimous, with one governor voting against the cut.

The statement was relatively neutral and gave little away about the likely future path for rates and neither really did President Christine Lagarde in the press conference. If nothing else, they are not sounding in a big hurry to cut again and continue to emphasise the importance of incoming data.

Statement relatively balanced on inflation

They note that since their September 2023 meeting, when they last hiked rates, “inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons.” However, in the next paragraph of the monetary policy statement, they also note that “domestic price pressures remain strong as wage growth is elevated”, that “inflation is likely to stay above target well into next year.” And that the ECB staff forecasts for inflation (core and headline) have been revised up for 2024 and 2025 (though I’d note that headline and core are at or slightly below 2.0% in 2026 on their forecasts, consistent with today’s rate cut decision).  

Not pre-committing

They continued to use the language: “It will keep policy rates sufficiently restrictive for as long as necessary” and (unsurprisingly) continue to indicate that they will follow a data-dependent, meeting-by-meeting approach and are “not pre-committing to a particular rate path.”

Why cut today? In her opening statement, Lagarde noted that the economy had perked up… and acknowledged that domestic inflation remained high. Against that backdrop and despite that upward inflation forecast revision from staff, Lagarde did explain more about why they cut today. Her explanation was that this was effectively about their increasing confidence in the path ahead.

A couple of times during the press conference she split the path of inflation into three sections and noted that in October 2022 they were looking at a 10.6% inflation rate, 5.2% by September 2023; then 2.6% today – as she pointed out, halving each time. She also talked about the “solidity” of the forecasts around the 2.0% mark from the fourth quarter of 2025. She later pointed out that interest rates were more restrictive today in real terms, than they were in September 2023 (when they last raised rates). More cynically, you could also suggest that they had somewhat ‘painted themselves into a corner’ with ECB speakers having hinted for some time that a rate cut in June was likely.

Data was a theme

There was a lot of focus on the need for sufficient data – supporting the idea that a July cut is unlikely. For example, they will be data dependent; they will analyse data under their three criteria (inflation outlook, dynamics of underlying inflation and the strength of monetary policy transmission); they need enough data so that the analysis is relevant; they need sufficient data over time. Lagarde did not explicitly say that they would not have much data to go on by July, but the general focus on sufficient data over time supports the assumption that back-to-back cuts from the ECB are unlikely. For example, she said that: “I’m not going to tell you today, nor at any point in time until much later on in the summer whether we do this now or we do something else at another point in time. The only thing I’m telling you is that we need sufficient data and data comes in gradually over the course of time… to actually corroborate the view that we have that the disinflationary path is being confirmed and warrants further decisions.” Later in the press conference she admitted that they do have more data when they have projection meetings (the next one of those is in September).

Probably the start of a rate cut cycle (“strong likelihood”), but not willing to commit

Lagarde was asked whether they are moving into a “dialling back phase?” and was non-committal. She said, “I wouldn’t volunteer that because… we are making a decision on the basis of the confidence that we have that we are on a path. But we will need at each and every point in time, in the course of the next few months…data and more data and analysis of those data to constantly confirm that we are on this disinflationary path. So, we know the destination, we know the direction that we are taking… but I cannot confirm that it is the dialling process that is underway. There is a strong likelihood, but it will be data dependent. And what is very uncertain is the speed at which we travel and the time that it will take.”

There will be other ‘bumps’ in the road of inflation getting back to 2%

Lagarde suggested it would not be wise to lay out what would happen and when, partly because the path of data will be bumpy: “We know it going to be a bumpy road, let’s face it. The next few months will continue to be bumpy, we know that.”

Overall, I’d see all this as reasonably consistent with my view that we’ll get two more rate cuts from the ECB later this year…but, as elsewhere, the data – especially the inflation data – needs to reassure in coming months.

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