ECB Insight: Governing Council to Cut by 25BP, Non-Event Likely

28 January 2025

ECB Insight: Governing Council to Cut by 25BP, Non-Event Likely

By David Barwick – FRANKFURT (Econostream) – It makes no sense to resent a meeting of the European Central Bank Governing Council, but if it did, then one might feel some animus precisely towards this week’s monetary policy gathering.

This is of course not the first such occasion taking place against a backdrop of near certainty about the outcome, no new projections and a low likelihood of a material change in language or outlook. Or by the inconvenient circumstance that the latest euro area inflation data won’t be available until the day after.

Even so, this meeting is one that lends itself to a relatively strong wish to just get it over with, to the sense that this is nothing beyond a necessary but mildly disagreeable interlude to be gotten through en route to March, when policymakers should know a lot more, for better or worse.

In the meanwhile, this meeting more than anything else will bring into stark relief the wearying uncertainty that has reached its apex with US President Donald Trump’s fresh return to the White House and the tenuous ceasefire agreement in the Middle East.

All this underlaid by the sense that something on the euro area’s eastern border has to give way soon and that a significant trade conflict is probably still brewing.

That is the bigger picture. The smaller one is a mosaic of many tiles. Will the cold winter push energy prices back up, or will Trump ‘drill, baby, drill’ enough to achieve the reverse anytime meaningfully soon? How much lower will the euro sink versus the dollar before it matters?

Will there be the further slowdown of services inflation needed for the ECB to get all the way to target? Will household consumption expand enough to underpin the long-awaited recovery? Will wage developments finally subside?

Amid such a plethora of open questions, we see the ECB as having little choice but to mark time.

That doesn’t mean stand pat. Optimism in ongoing disinflation is more than enough to ensure that the amply flagged 25bp cut will enjoy nearly unanimous, perhaps even complete support. Despite his renewed bout of recalcitrance, we would not be shocked if Austrian National Bank Governor Robert Holzmann came around in the end.

Not that it matters much. One doesn’t have to look far to confirm that Council members of all stripes find favour with how the ECB is proceeding.

That being the case, we don’t anticipate any serious discussion of 50bp – or for that matter 0bp - and aren’t convinced that anyone will bring either option up for more than pro forma motives (Holzmann being a possible but not inevitable exception).

Similarly, ECB President Christine Lagarde will not encourage expectations of either of these happening down the road; the paradigm is what Chief Economist Philip Lane only days ago called ‘the middle path of being neither too aggressive nor too cautious in our actions.’

Looking at the language of the 12 December monetary policy statement, we are hard-pressed to justify any change of the magnitude of that seen last month. In line with recent communication, we expect overall a tone of cautious optimism, underpinned by slightly less negative developments in the Middle East and Europe’s provisional reprieve from Trump tariffs.

Lagarde will probably restate what she referred to in Davos last Friday (quiet period for thee but not for me!) as the ECB’s ‘strong confidence that [inflation] is going down rather than up’, and reiterate the conviction that disinflation is on track.

But we also expect an even greater focus on services inflation, which nearly every Governing Council member who has spoken at all recently has pointed to as key for a sustainable return to price stability, and which Lagarde already in December had singled out.

Interest rates will still be deemed restrictive, but we can easily imagine Lagarde giving another nod to the steadily nearing neutral rate (‘we are getting closer, but we're not done’).

Though she will certainly refrain from situating neutrality more precisely than she did in very recent comments already (‘anything between 1.75 and 2.25’), she could invoke its growing proximity as strong grounds for a cautious approach.

All the same, she should be glad to reconfirm that the direction of monetary policy remains clear. Similarly, she will uphold the Council’s meeting-by-meeting, data-dependent modus operandi, even if she reiterates that increased confidence in the forecasts will give these a greater role over time.

Through it all, we stick to the view, which should now be entirely uncontroversial, that we expressed six weeks ago as follows: ‘we see the path to the terminal rate as paved with 25bp cuts at every meeting unless an unexpected development compels acceleration.’ That said, fine-tuning could eventually slow things down before the ECB is done.

We would hesitate to say the ECB is on autopilot, but as one Governing Council member said Monday to Econostream, there is no suspense even on policymakers’ part about the outcome of this particular meeting.