The European Central Bank (ECB) lowered its benchmark rate by 25bp yesterday taking the deposit rate to 2.75%, after cumulative 100bp cuts in 2024. The main refinancing operations and the marginal lending facility will be lowered to 2.90% and 3.15% respectively. Despite sticky inflation prints in recent months including survey-based indicators, growth concerns have overtaken price stability risks. The Governing Council expressed a strong conviction that inflation was likely to return to the target, with the official macro assessment not vastly different from December. To recall, the ECB had dropped “keep policy ... restrictive” in the December review, entrenching dovish bias in the settings. Add to this, ECB Chief Lagarde emphasized that despite recent rate cuts, policy was still restrictive, reinforcing our view that the reduction in the Euro area benchmark rates will be more than the US Fed in this cycle, seemingly a negative for the bloc’s currency.
Assessment on growth was cautious, with exports expected to contribute positively to recovery. Considering the potential for greater friction in global trade, and uncertainties on the spillover risks from any tariff announcements from the US, there is a likelihood that this engine might still underperform. Our growth forecast for 2025 is not far from 0.8% forecasted for last year, increasing the likelihood of a follow-up cut in March and backing our call for at least 75bp more cuts in the benchmark rate by end-year. Neutral rates are seen in the 1.75 to 2.5% range. Deeper the economic stagnation, greater the need to lower rates to the weaker end of the suggested neutral range.
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