ECB cuts rates in March, but tone turns more hawkish

ECB cuts again: At its meeting on 6 March, the European Central Bank (ECB) decided to cut its deposit rate by 25 basis points to 2.50%. It also cut its refinancing rate and its lending rate by 25 basis points each. The decision marked the fifth successive interest rate reduction and was aligned with market expectations.

Positive inflation outlook enables cut: The Bank decided to proceed with its easing cycle as it believes that the disinflation process is still well on track and that inflation will settle around the 2.0% target on a sustained basis. In line with this, the ECB downgraded its 2025 average core inflation forecast to 2.2% from 2.3%, highlighting that wage growth is moderating. That said, it upgraded its headline forecast to 2.3% from 2.1% due to stronger energy price dynamics. Meanwhile, although, prospective U.S. tariffs were not considered in the inflation projections, heightened trade policy uncertainty led the ECB to revise downward their projections for Euro area exports and GDP growth.

Easing cycle still not over: The ECB’s forward guidance became more hawkish. President Lagarde emphasized that the current macroeconomic landscape is clouded with uncertainty and added that the ECB would either cut or hold rates depending on incoming data. Our Consensus is for the Bank to reduce rates by around 50 basis points by year-end, though some panelists have upgraded their projections in light of heightened global uncertainty, German fiscal stimulus and recent ECB communication. The next meeting is set for 17 April.

Panelist insight: Carsten Brzeski commented on ING’s altered forecast: “With the increased uncertainty and the prospects of large fiscal stimulus, the ECB’s direction of travel after today’s rate cut is no longer as clear as it was a few weeks ago. A pause at the next meeting to come to terms with the new macro reality now looks realistic. At the same time, if most of the fiscal stimulus is delivered, there will no longer be the need for the ECB to bring rates into slightly accommodative territory. Instead, we see the ECB pausing at the April meeting and cutting the deposit rate one more time to 2.25% in the summer, our new terminal rate.” Nomura analysts echoed this projection: “The ECB is almost, albeit not quite at the end. We recently changed our ECB view and believe the ECB is likely to skip April, and we believe the ECB will deliver its final rate cut of this cutting cycle in June, bringing the depo rate to a terminal of 2.25%.”

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