The ECB will deliver a 25bps rate cut to the deposit rate at its meeting on Thursday, taking it to 2.50%. That would be the sixth such cut since the 4% peak. The rate decision is announced at 1315 GMT and a press conference, chaired by President Lagarde, follows at 1345 GMT.
The key question will be around guidance and whether the Governing Council thinks monetary policy is still “restrictive”. That is when interest rates are set at such a level, that they reduce money supply to slow economic growth and inflation. Any language tweak or even dropping the phrase could set up a pause in rate cuts, which would typically boost the euro.
EUR has been bought aggressively this week on increased efforts for a Ukrainian ceasefire and a huge German fiscal package around defence spending and infrastructure. But key resistance around 1.0530 in EUR/USD hasn’t yet been broken, amid tariff and geopolitical uncertainty. ECB President Lagarde is likely to be asked questions about all of the above! It also very likely means little forward guidance is given by her and the ECB.
Mixed data supports a cut
This week’s flash inflation data saw prices decline less than markets had hoped. Both the headline and core readings came in one-tenth higher than estimates, at 2.4% and 2.6% respectively. The decline in core was due to services inflation, which fell due to the weaker momentum seen in the past months and base effects. The data does support further rate cuts but that also shows that upside risks from wage growth to services inflation remains as momentum continues to be too high. Of course, tariffs could also add to this, as well as the stimulus measures currently being touted, amid already constrained finances.
On the growth front, the second read of Eurozone GDP in the final quarter of last year was revised a little higher, to 0.1% versus. the 0.4% seen in Q3. More timely survey data from S&P Global has seen the EZ-wide manufacturing print rise while services slipped, leaving the composite just about in expansionary territory at 50.2. The accompanying report noted “economic output in the eurozone is barely moving at all”.
Market reaction and language changes
Another change to the language could come with how much emphasis President Lagarde puts on there being “no pre-determined path” for policy. She could say that pauses have never been ruled out, for example. That could be the compromise with the hawks for keeping ‘restrictive’ in the statement, as they have been very vocal in recent weeks, questioning how much more policy easing there should be.
After this rate reduction, markets are more uncertain about what happens next, with an April move given around a 60% chance. Traders are reckoning on quarterly rate cuts after Thursday with a terminal rate just below 2%. But big uncertainty around tariffs especially remains and could weigh on the macro outlook. These could be the major driver for EUR/USD in the months ahead, though hopes for a Ukraine ceasefire and the possibility of more soft US data could also feature.
As we have said previously, maintaining flexibility and adjusting policy gradually according to the data has been the consensus call for a while, so any big differences to this will be seized upon by markets. Determining the policy path relative to neutral would certainly grab the attention of ECB watchers.