ECB – Lagarde not impressed by Powell

The ECB cut its deposit rate by 25 basis points to 2.75% today, as widely expected.

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Dr. Jörg Krämer

Commerzbank Economic Research

01/30/2025

Unlike the Fed, the ECB clearly suggested further rate cuts. We continue to expect three further rate cuts of 25 basis points each by the middle of the year, although there are also arguments in favour of a wait-and-see approach in the eurozone. For example, the ECB is likely to overestimate the decline in wage pressure in the second half of the year due to the construction of its forward-looking wage tracker.

It was a foregone conclusion that the ECB would cut its deposit rate from 3.0% to 2.75% today. Accordingly, what mattered most was what President Christine Lagarde would say about the future. By and large, there was no change compared to the last press conference in December. In its statement, the ECB repeated the core statement that inflation would return to its 2% target on a sustainable basis in the course of this year. The ECB will decide from meeting to meeting depending on the data.

Asked by a journalist whether the rate cut process could be coming to an end after a total of five rate cuts, Lagarde pointed out that monetary policy was still "restrictive", i.e. dampening the economy and inflation. This is a clear hint that the ECB sees room for further interest rate cuts. Lagarde emphasised that any discussion about a possible end to interest rate cuts was "premature".

ECB deposit rate at 2.0% in the middle of the year

All in all, Lagarde's comments confirm our forecast that the ECB will cut its policy rates three more times by 25 basis points each time. The next step is likely to take place in March, when the ECB publishes its updated projections for inflation and GDP. We continue to expect the deposit rate to reach 2.0% in the middle of the year.

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