Next stop June: we expect a rate cut of 25 basis points

As expected, the European Central Bank (ECB) opened the door to a first rate cut today, although the final decision will depend on the inflation outlook, the underlying inflation trend and the strength of monetary policy transmission. In particular, given our expectation of a further slowdown in wage dynamics, a rate cut in June seems to be set, and we would expect the deposit rate to be lowered by 25 basis points to 3.75%.

At the same time, today’s press conference confirmed three things in particular: First, the ECB is reacting to the economic environment in the euro area, which is much weaker compared to other economic blocs such as the United States. Second, the risk of sticky inflation, especially in services prices, has not been eliminated. Third, as expected, ECB President Lagarde emphasized the high degree of data dependency and stressed that the ECB is not pre-committed to a particular interest rate path. As a result, the unwinding of the tight monetary policy is likely to be a slow process.