ECB review: A dovish 25’er

The ECB decided to cut its three policy rates by 25bp, in line with market expectations.
The most important decision taken today, though, was to remove the pledge to keep monetary policy restrictive. The ECB now simply guides that it will use the three-tiered reaction function inputs as key metrics (inflation outlook, underlying inflation and strength of monetary policy transmission) to set its policy rates.
Markets didn’t take a specific cue from today’s press conference and continue to price 125bp of rate cuts in 2025.

Danske Research Team Danske Bank A/S

Removing the hawkish bias

Today’s decision was not clear cut, in our view, as the ECB could have opted for a 50bp rate cut in light of the weak economic growth outlook. However, staff projections showing inflation at target made it conclude that a 25bp rate cut was sufficient.

The decision was a dovish 25bp rate cut though, and we assess the communication around it to be as close as possible to 50bp without delivering such a cut. Lagarde also said that there were deliberations about a 50bp rate cut today. Overall we found the language on growth, labour market and underlying inflation on the dovish side. In particular, we highlight that Lagarde said that the risk to inflation is now ‘clearly’ two-sided.

While Lagarde didn’t provide guidance on the end point of the rate cutting cycle, nor about the size of rate cuts at a particular point in time, the policy rate outlook is linked to the three-tiered reaction function (inflation, underlying inflation and transmission mechanism). Lagarde said they didn’t discuss the neutral rate level, but referenced the study from earlier this year that pointed to a range of neutral real rate between -0.5% and 0%, thus they will discuss once they come closer. She said that conventional wisdom suggeststhat the neutral rate is probably a little higher than before.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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