The ECB Cuts Its Key Interest Rates by 25 Basis Points and Publishes Slightly More Pessimistic Forecasts

The economic and financial environment in the eurozone has deteriorated, which is reflected in the ECB’s forecasts. The Bank is slightly more pessimistic about economic growth and inflation. It came as no surprise that the ECB dropped its commitment to keep policy rates sufficiently restrictive for as long as necessary to bring down inflation.

However, upside risks to inflation persist. Wage growth in particular remains a source of concern (graph 1). This could further hamper the decline in inflation in the service sector. However, the ECB sees signs of a labour market slowdown, which should lead to lower wage growth in 2025. The Bank also believes that businesses have some leeway to use profits to absorb wage growth. The ECB is also counting on higher productivity gains to limit the inflationary effect of wages.

Christine Lagarde mentioned that discussions had focused on whether to potentially cut rates by 50 basis points rather than 25. The Governing Council ultimately opted for a smaller decrease, indicating a desire to loosen monetary policy gradually to better manage the risks to the economy and inflation. The ECB didn’t make any commitments about future monetary policy decisions, but we believe there’s room for further rate cuts. The ECB still considers its current monetary policy to be restrictive, but since it also indicated that a restrictive policy is no longer necessary, we expect to see further easing at future meetings. The Governing Council’s new economic forecasts aren’t pricing in an escalation in trade tensions. However, this is a downside economic risk that the ECB will have to manage in its future decisions.