ECB: Nothing to see here

Having delivered its first cut of the cycle last month, the European Central Bank (ECB) kept rates on hold today — as was widely expected. The interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility were kept unchanged at 4.25%, 4.5%, and 3.75%, respectively.

Markets may have been hoping that today the ECB would lay out a clear policy path. However, the meeting was particularly uneventful, with ECB President Lagarde deliberately non-committal and noted that the question of what do to in September remains “wide open.”

Recent developments

Broad market expectations are for the ECB’s next cut to come in September. Yet, Lagarde’s mantra today was data dependency. She appears to be responding to the fact that domestic inflation pressures remain somewhat sticky, and wages continue to rise at an elevated pace. Moreover, with the ECB’s inflation forecast being upwardly revised last month, Lagarde may have regretted her decision to pre-commit to a June rate cut and is looking to avoid the same mistake.

Yet, markets continue to expect a September cut (as do we). Inflation data has been broadly trending lower, various surveys suggest that wage growth will trend lower in 2025, the cyclical economic upturn has been losing steam, and, with the Fed increasingly likely to start cutting rates in September, the prospects of further euro depreciation are likely diminished.

Lagarde was questioned about the potential impact of a Trump victory in November’s U.S. presidential election. As with her discussion on the policy outlook, she was vague. However, she admitted that it would be an important issue to consider and a point of internal discussion.

Overall perspective

Today’s meeting provided limited new insights into the ECB’s thinking, other than that the September meeting is live. There is no reason to change our forecast – the next ECB rate cuts are likely to come in September and December.

Principal Asset Management