European Central Bank continues carefully along its rate cut path

Summary

The European Central Bank (ECB) delivered a widely expected 25 bps cut to its Deposit Rate to 3.50% at today's monetary policy announcement, but remained relatively cautious about the pace of future easing. The ECB said domestic inflation and wages are elevated, but that labor cost pressures are moderating. The ECB was also guarded with regards to policy guidance, saying it remains data-dependent, and will take a meeting-by-meeting approach to its monetary policy decisions.

Regarding its economic projections, the ECB lowered its GDP growth forecasts but, importantly, revised its core CPI inflation forecasts slightly higher, in part due to persistent services inflation. Indeed, given the Eurozone productivity and cost backdrop, we believe the risks are tilted toward underlying inflation subsiding more slowly than generally expected. We remain comfortable with our view for an ECB rate pause in October, to be followed by a 25 bps Deposit rate cut in December, which would see the Deposit rate end 2024 at 3.25%. Our view also remains that the ECB will continue lowering its policy rate at a steady 25-bps-per-quarter pace (that is, every other meeting) in 2025, which would see the policy rate reach 2.25% by the end of next year.

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