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.

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.

Download the Full Report!

Share: Analysis feed

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.