Key takeaways from the ECB meeting

Consistent with our scenario for the Eurozone (economic recovery and only gradual disinflation), the ECB has decided to cut interest rates but remains cautious about signalling further reductions. Lagarde explicitly states that any additional rate cuts will depend on further progress in reducing inflation. The current rate cut is justified by the progress seen in controlling inflation and the ECB’s increased confidence in a gradually declining inflation trajectory over the next few quarters. Additionally, early wage indicators are beginning to show signs of moderation, providing further justification for the cut. However, the ECB has also revised its economic growth and inflation projections upwards for 2024 and 2025. Lagarde emphasises that the ECB has not entered a phase of continuous rate cuts and will require more data confirming a benign inflation scenario before considering further reductions. This stance reflects the ECB’s commitment to maintaining sufficiently restrictive monetary policy to ensure inflation converges to the 2% target. Given the increasingly evident signs of economic growth recovery in the Eurozone, it is expected that the ECB will make only a few additional rate cuts this year and next, potentially leaving the terminal rate of this cycle around 3%.