Fidelity: ECB cuts rates, sees rates at 1.5% in September
Commenting on yesterday’s European Central Bank decision, Max Stainton, Senior Global Macro Strategist at Fidelity International, said:
'As expected, the European Central Bank (ECB) cut its deposit rate by 25 basis points (bps) to 2.25%. What was originally seen as a close call after last month’s fifth consecutive cut, was all but locked in going into the meeting. This was due to backward-looking data on wages and inflation showing disinflation is well on track, and forward-looking financial market indicators like falling energy prices and a rising euro reinforcing that this trend will continue.
While the statement removed the reference to still being in restrictive territory, much more significantly, the statement added the dovish caveats that 'the outlook for growth has deteriorated' and that 'the adverse and volatile market response to the trade tensions' will weigh on the economic outlook.
This darkened outlook will drive policy making going forward and dominated the press conference. President Lagarde emphasised that downside risks to growth have increased, and the risks to lower inflation are also rising as a result of the potential for trade diversion into the Euro area.
Overall, this was clearly a dovish meeting, with the General Councils’ statement and President Lagarde’s comments in the press conference clearly showing an awareness that growth and inflation risks are both moving to the downside. Lagarde stressed 'the key attributes' for the ECB going forwards are 'readiness and agility', an emphasis towards dynamism which we read as asymmetrically dovish.
This tracks with our own outlook for Europe and the ECB. With a 75bps growth shock coming from US tariffs, we expect little to no growth in the Euro area this year. Additionally, given some level of higher US tariffs on Chinese goods is here to stay, the disinflationary process in the Euro area is likely to accelerate as Chinese goods start getting shipped into Euro area markets at higher volumes, pushing down inflation and potentially supressing demand further. As a result, we retain our base case outlook that the ECB’s terminal rate will move to 1.5%, likely by September, with the risks around this view mainly driven by how the European commission reacts to the unfolding global trade war.'
