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Today’s ECB decision in a nutshell:
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ECB rates are cut by 25bp as expected, and EUR Deposit rate down to 2.50%.
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According to the ECB, “Monetary policy is becoming mean-ingfully less restrictive”, confirming previous comments by ECB members that the ECB is getting close to the neutral rate, and that the “normalisation part” of the monetary policy is nearing an end.
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As such, the rate cut cycle may soon end in the Eurozone, with just two additional rate cuts now priced in for the remain-ing of 2025.
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Downward revisions in GDP growth forecasts for 2025 and 2026, due to lower exports and ongoing weakness in invest-ment caused by high trade policy uncertainty and broader policy uncertainty.
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Based on ECB President Lagarde’s declaration during the press conference, the most recent developments in German and EU fiscal policy and defence spendings. have not yet been included in the ECB’s forecast, as they are still work in progress.
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President Lagarde mentioned that defence and infrastructure spendings “could be inflationary” and “could add to growth”, which would, in effect, reduce prospects of more ECB policy easing. The ECB’s President stated the obvious by saying that risk and uncertainty are “all over”.
› Today’s decision on rates was widely expected and doesn’t materially change the big picture.
› In the past fifteen years, the ECB had been in the frontline whenever a crisis arose in Europe, as fiscal policy was con-strained by European budget rules.
› Since Tuesday, this has reversed. The ECB now finds itself in the backseat: the ongoing fiscal policy developments in Germany and at the EU level are clearly dominating and radically changing the economic outlook of the Eurozone.
› Today’s meeting was too soon for the ECB to incorporate in its analysis the fiscal policy shifts in Germany and in the EU. The central bank will assess their potential impact on its monetary policy in the coming weeks and months.
› With such a large fiscal boost unleashed in Europe, growth and inflation risks are now tilted to the upside.
› As such, the risk has now shifted to the ECB possibly ending its rate cut cycle earlier than expected. Fiscal policy is taking dominance in Europe too.
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