ECB: An interim cut

A third 25bps rate cut delivered as expected

As we wrote in our note, there was little doubt the ECB would be “forced” to cut its policy rate outside of quarterly forecast meetings owing to the downside surprise in September flash core inflation (2.7% y/y). What is more, in its final form, euro area headline inflation was today revised down 0.1pp to 1.7%, meaning that ECB’s staff implied monthly (for September) profile miss was actually -0.3pp rather than -0.2pp. President Lagarde reiterated the mention from September that today’s rate cut was a case in point of ECB’s data-dependency (and not data-point dependency), highlighting also weaker-than-expected real activity data (more below). Today’s decision was reportedly unanimous on Philip Lane’s proposal - there was reportedly no discussion of a larger move. President Lagarde reminded that the ECB GC is in between two forecast exercises, and confidence that headline inflation is likely to edge up until the end of the year likely helped (on energy base effects, we agree). No surprise on rate decision nor new forward guidance elements to chew on implied little market reaction to today’s meeting.

An ever slight increased focus on growth

During the press conference, President Lagarde reiterated slight changes in the monetary policy statement: “The inflation outlook is also affected by recent downside surprises in indicators of economic activity”, putting an ever so slight increased focus on (persistent) growth disappointments. Despite several questions on the matter, she reiterated ECB’s soft landing baseline scenario, dismissing fears of imminent euro area wide recession. While we agree on the latter, we highlight our much weaker 2025 GDP growth forecast, foreseeing just 0.9% (Bloomberg consensus: 1.2% and ECB: 1.3%).  

At least back-to-back 25bps rate cuts until June

ECB’s policy moves and communication have been gradual and well telegraphed in this easing cycle. It does not mean a change of tone is out of question if the data support it. Consistent with our weak domestic demand-led growth outlook, we forecast headline inflation to come below ECB’s 2% target in the first three quarters of 2025, reaching a low in Q3 25 (1.8% y/y), while core inflation would continue its downtrend without too many humps and bumps. Already during today’s press conference, President Lagarde ventured to specify that risks to the inflation outlook are “a bit more skewed towards the downside than the upside” definitely burying the (surprising) upward revision of staff forecasts at the September meeting. We are thus comfortable with our recently revised baseline that the ECB would be cutting the depo rate by 25bps at each meeting until June 2025 when it would reach 2.0%, in line with market expectations. Our skew remains that we could get there quicker.