The ECB cut all main interest rates and revised down inflation forecast- We maintain our forecast that the ECB will cut rates two more times this year – in September and December
As expected, The Governing Council decided today to cut the three key ECB interest rates. The deposit facility rate, the main refinancing operations and marginal lending facility rates were cut by 25 basis points to 2.00%, 2.15% and 2.40%, respectively. In a press release the ECB did not mention neutral interest rate (which is estimated to be close to 2%) or the fact that current monetary policy may no longer be restrictive. Thus, this should be viewed as a dovish statement, leaving the door open for further cuts.
The ECB staff also updated its macroeconomic projections and now expect 2.0% headline inflation this year and only 1.6% in 2026, both 0.3 pp lower than in March. The revisions mainly reflect lower energy prices and stronger euro – the trend that for now seems unlikely to reverse. The medium-term inflation outlook remains unchanged – the ECB staff still sees inflation settling close to its target of 2% on a sustained basis. GDP projections were largely unchanged – growth was slightly stronger than expected at the start of the year, but “uncertainty surrounding trade policies is likely to weigh on business investments and exports”.
We maintain our forecast – the ECB is likely to pause in July, but will cut rates two more times this year, in September and December, bringing deposit rate to 1.5%. Going forward the risks are balanced – trade tensions may depress global trade and sentiment, further easing inflationary pressures. On the other hand, bigger fiscal stimulus or disrupted supply chains may reignite some inflationary pressures.
