The European Central Bank (ECB) cut its policy rates today for the fifth time in this cycle, also marking its fourth straight cut. The interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility were each lowered by 25 basis points to 2.90%, 3.15%, and 2.75%, respectively.
ECB President Christine Lagarde continued to emphasize a data dependent approach to monetary policy, refraining from providing any forward-guidance. Regardless, with upside inflation risks transitioning to downside growth risks—and that’s before even considering the likely impact of U.S. import tariffs—it is abundantly clear that ECB policy rates have further to fall.
Recent developments
The ECB appears confident that the disinflation process is well on track. Services inflation remains relatively sticky, but underlying indicators suggest it should slow over the course of the year. This process should be aided by the transmission of monetary policy conditions, which remain restrictive.
On the other hand, the ECB was less optimistic on economic growth, with both France and Germany’s economies contracting and the broad Euro-area at risk of stagnation. Fragile household and business confidence is weighing on consumption and investment, which is likely exacerbated by the potential escalation of trade tensions. Despite these concerns, however, President Lagarde noted that the ECB did not consider a larger 50bps cut at this meeting. She expressed the view that the robust labor market and rising incomes should help prop up the recovery, and this will be further supported by recent policy rate cuts.
Asked about the potential for tariffs, President Lagarde opted not to speculate on how monetary policy may evolve, instead noting that—given the elevated levels of uncertainty regarding their impact and scope—the ECB staff will only incorporate them into their projections as those policies become more concrete.
