Crédit Mutuel AM: A new rate cut in sight, but the ECB will act cautiously
By François Rimeu, Senior Market Strategist, Crédit Mutuel Asset Management
Widely anticipated by financial markets, the European Central Bank (ECB) is expected to lower its deposit rate by 25 basis points (bps) to 2.5%, marking the fifth consecutive rate cut and the sixth since June 2024, to support the economy. At the same time, the ECB is likely to confirm its inflation forecasts, with the annual inflation rate in the region converging towards the 2.0% target by the end of the year. The challenge for the Governing Council in this meeting will be to clarify to what extent it considers its monetary policy to be restrictive.
Below are our expectations:
- The ECB's Governing Council will reduce its key interest rates by 25 bps each, with balanced inflation risks. This will bring the deposit rate to 2.50%, the refinancing rate to 2.65% and the marginal lending rate to 2.9%.
- With the deposit rate (the central bank's key reference rate) approaching the neutral rate[1] (between 1.75% and 2.25% according to the ECB's February 7th analysis), we believe the Council will adapt its language, describing financing conditions as ‘moderately’ or ‘somewhat’ restrictive. We think the ECB will wait for the results of its quarterly euro area bank lending survey (BLS), which will be published on April 15, two days before its next meeting in April, before making a more pronounced change in its vocabulary.
- As a result, the ECB is likely to continue its rate cuts cautiously, remaining dependent on incoming data and attentive to U.S. monetary policy. The ECB's caution regarding the direction of its monetary policy beyond this meeting could imply a pause in April, although we believe the ECB has little reason to delay further monetary easing (particularly due to weak growth in the region). In all likelihood, the ECB has an intermediate target of 2%.
- Compared to the macroeconomic projections from December 2024, the ECB is expected to revise its growth forecast slightly downward for this year (from 1.1% to 0.9%-1.0%; Source: Bloomberg) due to weaker domestic demand and risks associated with U.S. trade policy, though these could be partly offset by prospects for peace in Ukraine. Regarding price developments, the ECB should maintain its inflation outlook unchanged, in line with its 2% medium-term target (core CPI, excluding energy and food: 2025: 2.3%, 2026: 1.9%, 2027: 1.9%). (Source: Bloomberg)
In summary, we do not expect any major changes from the ECB in March. The Governing Council will likely lower rates, probably unanimously, with minor adjustments in its economic outlook. Financial market reactions should be limited, unless there is a drastic shift in the ECB's communication, suggesting it no longer considers its monetary policy to be restrictive, which is not our scenario.
