ECB Insight: The End Is Nigh, or at Least Nigher

3 June 2025

By David Barwick – FRANKFURT (Econostream) – There’s no point denying the obvious. Even ultra-dovish Banca d’Italia Governor Fabio Panetta acknowledged on Friday that the European Central Bank’s room for further policy easing is narrowing.

That doesn’t mean there’s no room left today, and we would be astonished if the Governing Council failed to go through with the 25bp rate cut for which it has been laying the groundwork since at least the previous move.

It’s not just doves who are willing to cut on Thursday. Not counting Austrian National Bank Governor Robert Holzmann, the hawks seem to accept the idea. Executive Board member Isabel Schnabel called for rates to stay ‘broadly at the level they are at now’. Dutch National Bank Governor Klaas Knot urged a ‘stance that is neither accommodative nor restrictive’. Eesti Pank head Madis Müller found it questionable whether the ECB should ease ‘significantly’ further. And National Bank of Belgium Governor Pierre Wunsch effectively defected to the other side and speculated that the economic situation ‘might warrant to be mildly supportive’.

One searches in vain for likely sources of serious opposition.

But that’s June. Beyond that, when it comes to rate cuts, it is not just Panetta who sounds sceptical. Bank of Greece Governor Yannis Stournaras has repeatedly said that June would be the end, with a terminal rate of 2%.

We are loath to endorse Stournaras’ assessment. Things are much too uncertain for such confidence, and certainly the ECB will not slam any doors shut. We simply take the view that based on current information, July is significantly less likely than June to bring a cut, even unlikely.

Various Governing Council members would be correspondingly averse to a July cut acquiring any sense of inevitability. At the same time, June’s cut doesn’t hinge on accommodating them, and the ECB can be quite comfortable with what markets are pricing in as of Tuesday morning.

President Christine Lagarde will need to preserve optionality while ensuring that the ECB’s openness to all outcomes is not misread as preparation for a July cut. The less she disrupts current market expectations, the better.

The optionality part is easier. Developments – US President Donald Trump’s on-and-off threats, the US judicial tug-of-war over tariffs – justify the data-driven, meeting-by-meeting approach, which the ECB will stick to. The monetary policy statement will continue to want no truck with ‘pre-committing to a particular rate path.’

The second part is a bit riskier. Though the statement could observe that interest rates are now broadly neutral, the ECB will be reluctant to tweak it again so soon after having sanitised it of all reference to restrictiveness. And with market expectations not currently requiring strong pushback, the ECB needs to be wary of overdoing it.

More likely therefore is that Lagarde will carefully convey during the press conference that the air is growing thinner for further cuts. She can indicate that neutrality has been reached (one possible interpretation of Chief Economist Philip Lane's remark on 27 May that ‘we are in a zone of normal central banking’) or note that it is just mathematically so that policy space is now more constrained, though safer might be borrowing another Lane comment and saying that policymakers’ job ‘has now mostly been completed’.

None of this would prevent the ECB from cutting in July if it became necessary, much less in September or thereafter. To borrow from Lane again, ‘signs of further falling inflation’ would lead authorities to ‘respond with further interest rate cuts’.

But averting any automaticity about a July cut, even if 2026 inflation is surprisingly low, would face facts that have shifted to the forefront of some Council members’ minds.

In the end, a combination of ready support on the part of some and a tepid willingness to go along on the part of others should yield a near-unanimous outcome, like last time, when only Holzmann’s desire to be discounted let Lagarde claim unanimity (arguably disingenuously).

As for the updated projections, Council members have made no secret of the likelihood that these will indicate a weakening of growth but continue to show the euro area avoiding recession.

Disinflation meanwhile will be seen continuing thanks to slower wage growth’s dampening effect on services inflation. Indeed, Lagarde may have to address the issue of undershooting, and we suspect that Lane’s interview was partly intended to prepare for just this scenario.

Then there is the strategy review to which the ECB devoted its retreat last month in Porto, Portugal. The outcome of the reassessment has yet to be adopted by the Council. We expect this to happen at the non-monetary policy meeting on 25 June.

We do not exclude that it would be brought forward to this week, but the ECB will have plenty to discuss without the strategic review on the agenda. And adopting the review on 25 June would still let Lagarde highlight it at the ECB’s annual conference in Sintra a week later.

A couple of subjects not directly related to monetary policy could make for unpleasant moments. For one, the gathering will be overshadowed by the latest legal embarrassment for a Council member, namely the recent conviction for bribery of Peter Kažimír, head of the National Bank of Slovakia. Lagarde will no doubt be hoping that the issue doesn’t surface during the press conference.

Even less agreeable to Lagarde would be questions about the recent staff survey conducted by the International and European Public Services Organization (IPSO). Not only did the survey underscore the culture of cronyism at her institution, but 57% of the nearly 1200 respondents declared themselves as having no or low trust in her.

As well, she may have difficulty escaping questions about whether she is thinking of leaving the ECB early to go to the World Economic Forum, following developments that have left a void at that organisation's head.

On the other hand, we can readily imagine her taking the initiative to acknowledge with a few warm words Klaas Knot’s imminent departure, this being his last ECB monetary policy meeting (for now, at least). The going would have been noticeably tougher for her the last few years if there had been two Holzmanns on the Governing Council, especially one of Knot’s calibre.

Fortunately for her, Knot consistently tempered his hawkishness, significantly facilitating her consensus-building efforts. Of course, returning to Frankfurt at some point after his term at the helm of the Dutch central bank ends on 30 June remains a possibility, so being an exemplary team player was also in his own interest.