Please see the below update from Evelyn Partners for their thoughts on this afternoon’s (06/06/2024) ECB monetary policy decision:
What happened?
The European Central Bank (ECB) cut interest rates by a well communicated 25bps at their meeting today, taking their key deposit rate to 3.75%, main refinancing rate to 4.25% and marginal lending facility to 4.5% – from 4.00%, 4.5% and 4.75% respectively.
The inflation projection for 2024 was upgraded to 2.5%, from 2.3%, 2025 was upgraded to 2.2%, from 2.0%, and reiterated at 1.9% in 2026.
Guidance was updated to include a new line “The Governing Council is not pre-committing to a particular rate path.”
What does it mean?
The ECB’s decision comes after a nine-month period of being on hold and is their first cut since the beginning of 2016.
The move lower comes a day after the Bank of Canada became the first G7 central bank to cut rates in this cycle with their 25bp move lower to 4.75%, but notably ahead of the US Fed who has typically led monetary policy loosening in previous cycles.
Given that the move was so widely anticipated and already priced into the market, the focus was on the inflation projection and language surrounding future moves.
Arguably the upgrades to Inflation guidance struck a hawkish tone (introducing the hawkish cut?!) but the initial market reaction was surprisingly muted…
Unsurprisingly, and like other central banks, the guidance maintained a data dependent tone.
“The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.”
Bottom Line
The ECB’s Governing Council cut rates by 25bps taking their key deposit rate to 3.75%. Markets are pricing a second incremental cut in September/October and third in the first quarter of 2025 demonstrating a ‘steady as she goes’ approach given the high levels of uncertainty and persistence in services inflation domestically and arguably also abroad.
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Andrew Lloyd DipPFS
06/06/2024