New ECB guidance later in the summer

Investors had therefore been waiting for guidance about what happens next, however they did not get any. The statement noted simply that the Governing Council ‘will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction’ and was not ‘pre-committing to a particular rate path’.

While this as well as the monetary policy statement would suggest no particular bias to the future direction of interest rates, the bias still looks to be towards further rate cuts. President Christine Lagarde noted that interest rates were currently ‘far away from neutral levels’ while the ECB’s economists are projecting further disinflation (see below). She also noted that the Governing Council’s confidence in its inflation outlook had strengthened because of the stability of its medium term projections over recent quarters.

In addition, while the statement did not give any guidance at all on the timing of a future move, Ms Lagarde hinted in the press conference that July was not a possibility, but that the September meeting potentially was. In an answer to a question, she noted that ‘I'm not going to tell you today, nor at any point in time until much later on in the summer, whether we do this now or something else at another point in time' This suggests that the Council will analyse incoming data and signal (maybe in late August – when the Q2 negotiated wage number will also be published) whether an interest rate cut will come in September or later than that.

In terms of what the ECB will be looking at, it will continue to rest on the three conditions it has laid out previously. First of all, its expectations for the inflation outlook. Second, trends in underlying inflation (and here we think domestic inflation pressures as gauged by wage growth and services inflation will be particularly important). Third, the monetary transmission mechanism.

The ECB published updated projections for the economic outlook. It made modest upgrades to its growth and inflation forecasts, which largely seem to be backward-looking, reflecting the Q1 strength in GDP growth and the recent upside surprise to services inflation. Broadly speaking, the ECB’s forecasts moved from being slightly below to slightly above our forecasts. GDP growth for 2024 was revised back up to 0.9%, up from 0.6% and back near its forecast from December (0.8%). This is now higher than our own forecast for 0.7% growth, though the ECB’s growth forecasts for 2025 and 2026 were kept largely unchanged (2025 growth was revised slightly lower to 1.4% from 1.5%).

On inflation, the ECB raised its core and headline inflation forecasts higher by 0.2pp in 2024 (to 2.8% and 2.5% respectively). For 2025, its headline inflation forecast was also raised 0.2pp to 2.2%, but core was raised by a smaller magnitude of 0.1pp to 2.2%. 2026 inflation forecasts were kept unchanged, with the ECB continuing to see a slight undershoot of 2% in 2026 headline inflation at 1.9%. These forecasts are conditioned on slightly higher market-implied rate assumptions than in March (with the 3m Euribor 40bp higher at 2.8% in 2025, and 10bp higher at 2.5% in 2026).

Our base scenario sees the ECB reducing policy rates again at the September monetary policy meeting and at a 25bp pace at subsequent meetings. We are therefore removing a July rate cut from our scenario, which already had looked increasingly less likely given recent official communication and data. Still given that monetary policy is currently deeply restrictive and that we expect inflation to continue to come down, we think that an extensive rate cut cycle is on the cards over the next year or so.