MNI ECB Preview: How Restrictive Is The Question

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Executive Summary

• The ECB is fully expected to cut its three key rates by 25bp on Thursday, taking its deposit rate to 2.5%.
• It’s another step closer to neutral rates, which President Lagarde and ECB staff see in a 1.75-2.25% range. That should make future decisions more contentious even if senior ECB policymakers have been keen to downplay the relevance of neutral rates in policy discussions.
• Instead, expect focus on the degree to which language around the degree to which monetary policy is softened, with most analysts expecting at least some softening. Complete removal would be hawkish.
• With the statement expected to stick to data dependency and a meeting-by-meeting stance, any implications for near-term policy setting will likely hinge on the balance of risks.
• The new macroeconomic projections should see modestly softer economic growth and a temporary step higher in inflation (on energy grounds from cut-off assumptions). There’s a risk they are seen as stale but inclusion of some tariff assumptions/scenarios, which most don’t expect to be factored in, would help here.
• There are non-trivial odds of a subsequent pause in April. Further cuts are clearly still expected though, with the market pricing a 2% deposit rate in July and close to 1.75% by end-2025.