The European Central Bank (ECB) cut its benchmark rates by 25bp for a second time this year, taking the deposit facility rate to 3.5%. The main refinancing rate was lowered to 3.65%, effectively narrowing the spread between the two rates to 15bp. ECB President Lagarde cited the evolving inflation-growth trends as backing yesterday’s rate cut. There was no explicit guidance on the path forward, besides emphasizing the need to take a meeting-by-meeting approach and staying data dependent. Updated quarterly staff projections provided limited fresh cues. Growth forecasts were trimmed slightly, while inflation was unchanged. Headline inflation is seen at 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026, as in the June projections. The Eurozone economy is expected to grow by 0.8% in 2024 (in line with our forecast), rising to 1.3% in 2025 and 1.5% in 2026, marking a slight downward revision vs June, mainly owing to a weaker contribution from domestic demand. Growth conditions warrant further easing but correction in inflation is likely to be slower in midst of wage-led pressures and base effect led distortions as the previous disinflation in energy prices fall out of the annual calculations. With policy communication in July working as planned, the ECB might opt to slip into a status quo mode in October and crystallise the need for further easing in December, when the next batch of staff forecasts are available. Our forecast path foresees a total 100bp reduction in rates by mid-2025, with half already delivered to date. In the near-term, markets are cued into the upcoming US FOMC’s rate move and guidance, which might hold considerable sway over the US dollar/ yields, as well as bond markets across the Atlantic.
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