ECB rate path unclear amid ' very real risk' of terminal rate below 2%

There were no real surprises whatsoever from the ECB on Thursday. As was fully priced in, rates were lowered by another 25bps.

The statement noted that disinflation was ‘well on track’, with policymakers appearing confident that inflation would settle around the 2% target in a sustainable manner. The communications largely struck a dovish note, as wage pressures were said to be ‘moderating’ with the economy ‘still facing headwinds’.

All told, we see no reason at all to deviate from our call for another ‘standard-sized’ rate reduction at the next council meeting in May, which would be the sixth in a row.

The path for rates beyond then is less clear, and will be very much data-dependent, a point that Lagarde was keen to hammer home during her press conference on Thursday.

For now, markets continue to see a terminal ECB rate of around 2%, but there remains a very real risk that the cutting cycle could go even further than that, particularly should activity data continue to surprise to the downside.

Thursday’s Q4 GDP report confirmed that the Euro Area is currently deep in the mire of stagnation, with the bloc’s economy posting no growth at all in the final three months of the year (below the 0.1% estimate).