DWS: Less scope for ECB rate cuts in coming months
By Ulrike Kastens, Economist, DWS
Higher growth in the Euro area and a slowdown in the disinflation process significantly limit the scope for further rate cuts in the coming months.
The ECB stays on course and cuts the deposit rate by a further 25 basis points to 2.50%. This brings the total number of rate cuts since June 2024 to 150 basis points. However, the direction of travel is less clear. In our view, three topics are important. In contrast to the January statement, monetary policy is no longer described as "restrictive" but as "meaningfully less restrictive". ECB President Lagarde justified this primarily with the increase in mortgage and corporate lending in recent months.
The extreme (economic) policy uncertainty requires a high degree of vigilance and a focus on data dependency, which is likely to continue to determine the future course of monetary policy. When asked, she would not rule out either a pause in April or a further rate cut. There was no pre-commitment to a specific interest rate path. Thirdly, she remained cautious about a possible increase in defence spending on growth. She said that they wanted to wait and see what the details, financing, etc. look like before coming to an assessment. However, she spoke of a significant boost to the economy and upside risks to inflation.
Although uncertainty is high, the balance has shifted significantly in recent days. We expect higher growth rates in the euro area and a slowdown in the disinflationary process. All this will significantly reduce the scope for further interest rate cuts in the coming month.
