As expected, the European Central Bank (ECB) lowered interest rates by 25 basis points but surprisingly dampened the likelihood of further easing soon.
Policymakers had an almost-unanimous vote to cut the deposit rate down to 3.75% and the main refinancing rate to 4.25% as one dissenter (Holzmann) wanted to keep policy unchanged.
Link to ECB’s June Monetary Policy Decision
In their official statement, the ECB mentioned that “inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly.” Moreover, they also noted that “Underlying inflation has also eased, reinforcing the signs that price pressures have weakened.”
Updated staff projections showed positive revisions to growth and inflation forecasts for this year and the next:
- Headline inflation is seen averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026
- Core inflation is seen to be averaging at 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026
- Growth is expected to pick up to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026
During the press conference, ECB Governor Christine Lagarde refrained from giving forward guidance on the timing of future policy moves, reiterating that that the ECB was not pre-committing to any particular path for rates.
Link to ECB Press Conference Q&A
When asked about market expectations for more interest rate cuts this year, Lagarde stressed their data-dependent approach and explained that they also have to take into account “the reliability and the strength of [their inflation] projections.”
Market Reactions
Euro vs. Major Currencies: 5-min
Overlay of EUR vs. Major Currencies Chart by TradingView
The euro had been cruising slightly lower ahead of the actual ECB decision, as market players were likely positioning for a dovish statement that would contain more hints about future cuts.
Although the central bank cut rates as expected, euro bulls appeared to find reason to charge upon seeing the upgraded growth and inflation forecasts, suggesting that further easing is not a done deal just yet.
The shared currency popped sharply higher across the board during what was deemed as a “hawkish cut” announcement but gave up a bit of ground (and then some) as the ECB presser took place.