ECB Insight: Expected Non-Event Materialises, With Nothing in the Way of a March Rate Cut

30 January 2025

ECB Insight: Expected Non-Event Materialises, With Nothing in the Way of a March Rate Cut

By David Barwick – FRANKFURT (Econostream) – The press conference following Thursday’s monetary policy meeting of the European Central Bank’s Governing Council was fully in line with expectations, so with nothing to indicate that the ECB is anything but clearly on track for another 25bp cut in March.

Little if anything about the press conference or the rate decision preceding it constituted even a mild surprise. That includes the fact that today’s 25bp cut enjoyed unanimous support; we wrote here only Tuesday that ‘[d]espite his renewed bout of recalcitrance, we would not be shocked if Austrian National Bank Governor Robert Holzmann came around.’

And why shouldn’t he have come around? ECB President Christine Lagarde took various opportunities to assure observers that, as the third sentence of the monetary policy statement already stated, ‘[t]he disinflation process is well on track.’

The statement – whose language hardly deviated from that of the previous such occasion on 12 December – also made clear that policy remains in restrictive territory even with today’s cut, which Lagarde then reaffirmed.

As if that weren’t enough, she poured plenty of cold water on speculation that today could have been the appropriate moment to launch a discussion about where the end might be.

‘And we have not had a discussion - because it would have been premature at this point in time - about the point where we have to stop’, she said. ‘We know the direction of travel … and this is the direction that we will take.’

Indeed, Lagarde seemed even more than one little rate cut removed from the need to ponder the terminal rate, given her reference in the next breath to how the journey there ‘will be informed by the data that we will collect in the coming weeks and months’.

That is, not just ‘weeks’, but rather, ‘weeks and months’.

The idea that March wouldn’t be the beginning of the end found further support at least twice.

For example, Lagarde hinted strongly that her recent placement of the neutral rate between 1.75% and 2.25% - which constituted a sudden shift downward of the upper limit previously cited by her - reflected the latest ECB research, which she said today would be published on 7 February.

Moreover, at one point of the press conference she was specifically asked by when the ECB would need proof that services inflation was subsiding to continue loosening the monetary reins post-March.

Lagarde conceded that services inflation was ‘one particular item which is still resisting’ disinflation ‘and has actually gone up a little bit’.

However, she elaborated, this item was ‘largely … labour-intensive and as a result, wage-sensitive’, and ‘all the indicators that we have at the moment … are confirming our confidence that wages in ’25 will be going down’.

Still, that the 6 March meeting could be an important way station came across in her comment that the ECB would be ‘lucky’ in that this gathering would benefit not only from an updated set of macroeconomic projections, but two more spot inflation readings.

At Econostream, as shared on Tuesday, we were sceptical that the possibility of a 50bp cut would even enter Thursday’s discussion, and it did not, according to Lagarde. ‘I can reassure you right away, we did not even utter the two numbers “five zero”’, she said. ‘So, 50 was not in the debate at all.’

All in all, we see a further 25bp cut in March as a given, barring unexpected developments, with a strong likelihood of another one in April and a decent probability of one in June, following which we would expect the ECB to stop and think hard about whether and when any more easing is needed.