ECB – what the premature rate cut means

After the widely expected rate cut of 25 basis points, the ECB said little concrete today about the further development of interest rates.

Dr. Jörg Krämer

Commerzbank Economic Research

June 6 2024

President Lagarde repeatedly stressed that everything depends on the data. We continue to expect the ECB deposit rate to fall from the current 3.75% to 3.0% by the first quarter of 2025. After that, we do not expect any further rate cuts because the inflation problem is unlikely to be solved for a long time yet. Ultimately, today's rate cut is premature.

As expected, the ECB cut its key interest rates by 25 basis points today. The deposit rate now stands at 3.75%. In its statement, the ECB justified this move by stating that it is now more confident that inflation will return to its inflation target of 2% in the medium term.

During the press conference, investors focussed on finding out what could happen next with policy rates. ECB President Lagarde repeatedly said that future rate decisions depend on the data. In particular, she referred to the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

No rate cut cycle

In our opinion, future interest rate decisions will depend primarily on inflation and wage data. We remain cautious here. Due to the recent strong rise in wages, inflation is likely to stabilise at 3% rather than 2% at the end of the year – especially as the decline in goods inflation (excluding energy and food) is largely over. It should also be borne in mind that the ECB Governing Council is dominated by doves. It is therefore likely to be many months before the ECB admits that the inflation problem is far from being solved. We continue to expect further rate cuts of 25 basis points in each of the next three quarters, which would put the ECB deposit rate at 3.0% at the beginning of next year. After that, we do not see any further interest rate cuts. So we cannot speak of a real rate cut cycle.

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