Europe | What’s the story with the ECB’s rates?

Summary

As expected, the ECB cut interest rates by 25 basis points, as inflation improves and medium-term risks diminish. Christine Lagarde dropped no hints regarding possible future decisions, as per the central bank’s recent policy of taking action meeting by meeting, based on hard data.

Key points

• Key points:
• The ECB cut its deposit interest rate by 25 basis points, in response to low inflation and a moderate growth outlook. This is the second cut of this cycle.
• The ECB refuses to pre-commit when it comes to a particular rate path, and will make decisions meeting by meeting, without guiding long-term expectations, given the high uncertainty surrounding the path inflation will take.
• Concerns remain over the impact of wage increases and service prices, which have not slowed as expected. Although the wage adjustment is considered temporary, the forecast for core inflation has been raised slightly.
• The recovery in domestic demand, especially consumption, will now take longer to materialize. Although a boost from falling inflation was expected, GDP growth remains weak, only supported by net exports.
• Productivity growth, following the strategy of the Draghi Report, could benefit both the European economy and the ECB’s own policies, which faces a structurally weak economic outlook, particularly in Germany.

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