ECB review: A cut and no rate guidance

The ECB has decided to cut the deposit rate by 25bp today, following the June rate cut, bringing the deposit rate to 3.5%. The accompanying staff projections only saw cosmetic changes. Lagarde highlighted the further confidence of the 2% inflation target being met in the medium-term.
Lagarde gave no guidance on the timing of the next policy move, yet given that she did not see the need to impact the market pricing, we believe that the ECB is overall content with the current market pricing of 25bp/quarter through the end of next year, as domestic inflation pressure remains elevated due to high wage growth.

Inflation projections unchanged compared with June amid slightly weaker growth outlook

Lagarde noted that the economic recovery currently faces headwinds, with its downside risks to growth. At the same time, Lagarde highlighted that the ECB expects the recovery to strengthen over time due to rising real incomes and fading monetary policy restrictiveness. And while the labour market has remained strong, in the first half of the year the ECB noted some moderation as the vacancy rate has fallen close to pre-pandemic levels, while labour demand and wage growth has also come down.

The updated staff projections showed that the growth outlook was adjusted marginally lower across the horizon. GDP growth is now expected at 0.8% in 2025 (vs. 0.9% in June), 1.3% in 2025 (vs 1.4% in June), and 1.5% in 2026 (vs 1.5% in June). The downward revision is mainly due to weaker contributions from domestic demand over the next few quarters as private consumption and investments are weak.

The new staff projections on inflation were almost identical to the June projections as inflation has come in ‘broadly as expected’. Headline inflation is still projected to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026. In particular, Lagarde noted that they have become more confident of the inflation outlook as it is the fifth consecutive projection seeing inflation at 2% in the second half of 2025. The forecast on headline inflation was unchanged as energy futures have moved lower while the outlook for core inflation was revised slightly up. The ECB staff is now projecting core inflation to average 2.9% in 2024 and 2.3% in 2025, which is 0.1pp higher than in June, while they still expect core inflation at 2.0% in 2026.

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