ECB Insight: Insiders See 50BP Cut as Unlikely, but Agree That if There Were One, Then in March

17 January 2025

By David Barwick and Marta Vilar – FRANKFURT (Econostream) – With so many members of the European Central Bank Governing Council, hawks and doves, having endorsed a gradual approach to monetary easing, pressing them on the issue of a possible 50bp cut at some point may seem downright fanciful.

Nonetheless, in the interest of exploring more remote contingencies, we took some opportunities to raise with ECB insiders the question of when the probability of a 50bp cut - even if still assessed as low from the current perspective - would be highest.

The two-part conclusion of that effort is that a 50bp cut remains improbable, but that in the event – unlikely as of now - that there were to be one, the most promising candidate would be the 6 March monetary policy meeting.

Again, this is not to say that anyone expected such an outcome. Rather, March was seen simply as less unlikely than any other meeting to turn out to be a potential window of opportunity for this to occur.

The reasons insiders cited were threefold. First, by March more certainty was expected about the outlook on various key fronts including geopolitics, US trade policy and inflation in the euro area, given the service sector repricing to take place previously.

The latter point is of very high importance; as discussed in this space yesterday, policymakers are keenly aware that services inflation still harbours the potential to interfere with the disinflation process.

Second, March would bring a new set of macroeconomic forecasts. Some insiders seemed to consider the December projection round of little value, and to be waiting for the March exercise.

Third, as the ECB cuts interest rates, independent of the size of the cuts, there mathematically remains that much less room for further steps, ceteris paribus.

In particular, following the Governing Council’s 30 January decision, which is likely to take the key rate to 2.75%, the ECB will be within spitting distance of the range in which the neutral level is suspected to lurk.

At that point, even in March, a 50bp cut would need strong justification. After March, such justification would need to be considerably stronger, as insiders see it.

The ECB’s new 2027 forecast seems unlikely to deliver such justification for now, in the view of insiders. One insider went so far as to question whether the inclusion of a third year, which the ECB added in 2014, even made sense. The 2027 forecast ‘doesn't add a lot of value to me’, he said.

Another insider echoed that sentiment in similarly blunt terms, describing the usefulness of the 2027 forecast as ‘approximately nil’.

One problem with the 2027 projection, a third insider explained, has to do with something ECB President Christine Lagarde glossed over at the press conference on 12 December, namely when she said that the ECB was projecting HICP of ‘2.1% in 2027 when the expanded EU Emissions Trading System becomes operational.’

The ECB couldn’t possibly know now whether, as it apparently expects, the ETS would add 0.3 point to 2027 inflation, this insider said with an eye roll.

Another insider said more diplomatically that ‘one has to be very, very careful, very cautious’ in estimating the impact of the ETS. ‘There is lots of uncertainty around that.’

Essentially, he said, the ECB had no choice but to come up with an estimate, but given a host of unanswered questions around the ETS, it was stabbing in the dark. ‘The precise ETS allowance is unknown, along with the extent of the pass-through and the duration of the pass-through’, he explained.

The ECB also didn’t know how member states, some with individual schemes of their own, would respond, he continued. In effect, he said, ‘there are still so many uncertainties that we have to take these initial estimates with great caution and wait for additional information that will allow us to produce more reliable estimates of the impact.’

The implication, he made clear, was that the ECB’s 2027 inflation forecast had little if any meaning for current monetary policy.