ECB Cuts Rates For The 7th Time, Outlook Leans Dovish Amid “Exceptional Uncertainty”

As expected, the ECB cut its three main rates by 25bps for a 7th consecutive time (deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.25%, 2.40% and 2.65% respectively). Of note, for the first time this easing cycle the central bank dropped the word “restrictive” from the statement. Reuters reported that the decision to cut rates was unanimous, as even some of the more hawkish rate setters agreed the global trade was has significantly altered the outlook.

The ECB also delivered a dovish outlook given “exceptional” uncertainty. The cut was based on the “updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission”, the Governing Council said in the statement. 

The ECB said the disinflation process is well on track but added the outlook for growth has deteriorated owing to rising trade tensions. Increased uncertainty “may further weigh on the economic outlook for the euro area”, it said. In addition, the ECB dropped the word “restrictive” in reference to monetary policy – a point of debate among policymakers in recent weeks.

Parsing the statement, here are the highlights

TRADE:

• The adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions.
• These factors may further weigh on the economic outlook for the euro area
• Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions

INFLATION:

• Inflation has continued to develop as staff expected
• Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target

WAGES:

• Wage growth is moderating

OUTLOOK:

• The euro area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions
• Will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance

In kneejerk reaction, the EURUSD fell from 1.1361 to 1.334, a fresh session low, in 2 minutes, as the market viewed the statement more dovish than expected (to Trump’s credit, who called the growing bifurcation between the ECB and the Fed as the basis for his anger). In line with the dovish response, the Jan 24 Bund future rose from 130.95 to 131.17, while the Stoxx 50 saw a modest move higher.

Overall, the decisions was largely as expected with the prior language around restrictiveness removed, given today’s 25bps cut takes the ECB to the top-end of its 1.75-2.25% neutral rate estimate. Interestingly, the line around restrictiveness was removed and was not replaced with any reference to that neutral band or similar; not necessarily a signal or similar, but still a point to note. Elsewhere, forward guidance was unsurprisingly non-committal, though the statement does highlight increased uncertainty and an associated confidence impact is which ‘ likely to have a tightening impact on financing conditions’. Given this, we now look for any hint of an offsetting policy response (i.e. dovish action) to counter the “likely” tightening of financing conditions – a point which may have driven the slightly delayed dovish reaction.

Earlier:

Preview

OVERVIEW: Expectations are for the ECB to cut the deposit rate by 25bps to 2.25%. Despite the positive impulses from the German fiscal reform package and the Euro being at a record high on a trade-weighted basis, the expected negative growth shock from the global trade war is set to see policymakers ease monetary policy to the top of the estimated neutral range. Focus for the release will be on how the ECB is currently modelling the impact of the trade war on the Eurozone economy and how it could shape monetary policy in the coming months. That being said, the ECB will likely adopt a non-committal tone on account of the uncertainty surrounding the Trump administration’s trade practices.

PRIOR MEETING: As expected, the ECB pulled the trigger on a 25bps reduction to the Deposit Rate. Greater attention fell upon the Governing Council’s decision to tweak its policy statement so that it reads “monetary policy is becoming meaningfully less restrictive” (prev. “monetary policy remains restrictive”).

Elsewhere, the Bank opted to reiterate its data-dependent and meeting-by-meeting approach, whilst stating that it will not pre-commit to a specific policy path. For the accompanying macro projections, the headline 2025 inflation forecast was raised to 2.3% from 2.1%, 2026 held at 1.9% and 2027 trimmed to 2.0% from 2.1%. On the growth front, policymakers cut their 2025 and 2026 growth views whilst holding 2027 at 1.3%. At the follow-up press conference, President Lagarde remarked that the statement language tweak was not an innocuous change and word changes have meaning. She added that the ECB is now moving towards a more ‘evolutionary approach’. With regard to the policy decision, all policymakers, with the exception of Austria’s Holzmann (who abstained), backed the announcement. Lagarde suggested that the GC could cut again or pause its cutting cycle depending on the data. The fact that Lagarde classified the policy discussion as “lively” and Intense” suggested upcoming decisions will become more contentious.

RECENT ECONOMIC DEVELOPMENTS: March’s flash HICP report saw Y/Y inflation slip to 2.4% from 2.6%, super-core decline to 2.4% from 2.6% and services inflation fall to 3.4% from 3.7%. The February ECB Consumer Expectations Survey saw the 12-month and 3-year forecasts hold steady at 2.6% and 2.4% respectively. In terms of market gauges, the 5y5y inflation forward has declined to around 2.07% from the 2.22% seen at the time of the March meeting. On the growth front, 01 GDP data is not released until April 30th. However, more timely survey data from S&P global showed the EZ-wide manufacturing print tick higher to 48.7 from 47.6, services rose to 51.0 from 50.6, leaving the composite at 50.9 vs. prev. 50.2. In the labour market, the unemployment rate in the Eurozone remains at its historic low of 6.1%. It’s also worth noting that the trade-weighted EUR is currently at a record high.

RECENT COMMUNICATIONS: Given the fluidity of the trade situation, a bulk of the comments since the prior meeting have been viewed as somewhat stale. However, in recent sessions. President Lagarde (11th April) noted that the Bank is ready to use the instruments it has to procure price stability if needed. France’s Villeroy (10th April) said US President Trump’s pause decision was less bad news but bad news elements remain. He also remarked (9th April) that a trade war will lower EZ growth by 0.25pp in 2025; shock will not be negligible but will not be a recession. Austria’s Holzmann (9th April) said he does not see the reason for a rate cut for now, adding that waiting is the best strategy when uncertainty is this high. He added that considering an outsized 50bps cut is “ludicrous”. Elsewhere at the hawkish end of the spectrum, Netherlands’ Knot (9th April) is of the view that the impact of the trade war is likely inflationary in the long term. Finland’s Rehn (9th April) stated that the case for continuing rate cuts at the April meeting is supported by downside risks materialising. Typically a dove, Stournaras of Greece (8th April) has conceded that the potential increase in inflation may delay the normalisation of monetary policy.

RATES: Expectations are for the ECB to cut the deposit rate by 25bps to 2.25%, according to 61/71 economists surveyed by Reuters (note, some of these forecasts may be considered out of date given the fluidity of the trade war). Financial markets have greater conviction over a 25bps rate cut and price such an outcome at 99%. The backdrop to the meeting has been dominated by US President Trump’s trade agenda. At the time of writing, US President Trump announced a 90-day pause in tariff actions and cut reciprocals to 10% for nations that asked for talks. The EU responded by delaying its countermeasures (due on April 15th) to the US. Overall, the outlook for trade has improved over the past few sessions, however, it remains highly uncertain and therefore continues to suppress the growth outlook for the region. Accordingly, policymakers are set to take action by loosening monetary policy further. Note, an outsized move of 50bps is unlikely with ECB’s Simkus stating that he sees no need to talk about such an increment. Markets will also be looking to see if Holzmann (or any others) abstains from the decision. ING writes that given expectations of a cut, “the ECB will also have to change its communication. Instead of ’monetary policy is becoming meaningfully less restrictive’, the ECB is likely to flag that at 2.25%, the deposit rate would now be within the range of neutral interest rates”. It remains to be seen whether the Bank will insert any additional language in lieu of the ongoing trade war. Beyond the upcoming meeting, market pricing has been particularly choppy given the volatility in markets. However, the next 25bps reduction is fully priced by July with 80bps of easing implied by year-end.