Rates decision. As widely telegraphed, the ECB cut the three key interest rates by 25bp, leaving the Deposit Facility rate at 2.00%, the Main Refinancing Operation (MRO) rate at 2.15% and the Marginal Lending Facility (MLF) rate at 2.40%.
Regarding forward guidance: i) the ECB maintained the “data-dependent” and “meeting-by-meeting” rhetoric; ii) Lagarde explicitly stated that the ECB is now in a good position to navigate the potential outcomes that could arise in the future; iii) in practical terms, our take is that although the ECB is willing to leave the door open for further rate cuts if warranted, it has also made some clear suggestions that this may not necessarily be the case in a mechanical sense.
Macro assessment and staff projections: i) despite the still challenging scenario looming ahead for the Eurozone, the ECB did not find any arguments to downgrade growth beyond the move made in March, leaving the figures almost unaltered at 0.9% YoY for 2025, around 1.1% in 2026 and 1.3% in 2027; ii) as for inflation, the downward revision of headline figures for the next two years (c.0.2/0.3pp) was close to a done deal; regarding the risk assessment, the outlook “is more uncertain than usual”.
Our view: i) we now consider the rate-cutting cycle to be over at current levels, which would mean no additional rate cuts in the remainder of the year; ii) we maintain our view that financial conditions will be the key element that determines whether additional rate cuts are warranted; iii) in this sense, a key feature in this hypothetical negative (dovish) context would be the EUR strengthening significantly, arguably in response to risk-off in other currency denominated assets (i.e., a “bad” kind of appreciation that would have to be countered).