ECB Cuts Rates by 25bps, Signals Continued Data-Dependent Approach

ECB Cuts Rates by 25bps, Signals Continued Data-Dependent Approach 

In the past 24 hours, the ECB became the second G7 central bank to start an easing cycle following the Bank of Canada The ECB officially announced a widely anticipated 25 basis points cut to its key rates

Deposit Facility Rate down by 25bps to 3.75% Main Refinancing Rate down by 25bps to 4.25% Marginal Lending Facility Rate down by 25bps to 4.50%

This marks the ECB's first rate cut since 2019 The decision was based on an updated assessment showing improved inflation outlook and decreased underlying inflation The ECB stated that the need for restrictive monetary policy had lessened after nine months of stable rates Since September 2023 inflation has dropped over 2.5 percentage points and inflation expectations have declined across all time frames

However the ECB noted that domestic price pressures remain strong due to high wage growth and inflation is expected to stay above target into the next year Revised projections show headline inflation at 2.5% in 2024 2.2% in 2025 and 1.9% in 2026 Excluding energy and food inflation is forecasted at 2.8% in 2024 2.2% in 2025 and 2.0% in 2026 Economic growth is expected to reach 0.9% in 2024 1.4% in 2025 and 1.6% in 2026

In summary the ECB's target of 2% inflation seems unattainable at present

Regarding future rate cuts the ECB stated it would maintain restrictive policies as long as necessary to achieve its 2% medium-term inflation target Decisions will be data-driven and reviewed at each meeting with no preset path for rates

The ECB's new economic projections are 2025 inflation at 2.2% previously 2% 2026 inflation at 1.9% unchanged

The ECB's rate cut and cautious outlook had predictable market effects the EUR/USD rose from 1.0863 to 1.09 in ten minutes while the Bund Sep'24 fell from 131.14 to 130.82 The DAX Jun'24 dropped from 18739 to 18686 in the same period

In summary the ECB's rate cut met expectations but offered no clear future guidance reinforcing its data-dependent cautious stance Despite acknowledging improved inflation the ECB remains wary of domestic price pressures and committed to restrictive policies until its 2% inflation goal is achieved