Rates decision. Much as expected, the ECB cut the Deposit Facility rate (DFR) by 25bp to 3.50%. In addition, the central bank cut the Main Refinancing Operation rate (MRO) and the Marginal Lending Facility rate (MLF) by 60bp, leaving them at 3.65% and 3.90%, respectively. This differential size of rate cut in the MRO and MLF rates corresponds to the intended reduction in spread between the DFR and the MRO already announced by the ECB in March: the new target spread will be 15bp rather than 50bp, whereas the one between the MRO and MLF remains unchanged at 25bp.
Regarding forward guidance, no big surprise. We have not perceived any real suggestion by the ECB that the pace ahead will consist of a mechanical rate cut on a meeting-by-meeting basis but rather that a (dovish) pause can be expected in some meetings. In this sense, we expect the next rate cut (25bp) to be made in the December meeting (no change in the October meeting).
Against this backdrop, today’s message has done very little to alter the firmly dovish approach the markets still have on the ECB’s rates strategy and the ESTR forward curve still discounts c.42bp of cuts before YE24 and c.100bp of additional cuts in 1H25 just to land at around 2% (by July).
Macro assessment. i) Economic assessment: growth prospects remain subdued, particularly in relation to domestic demand (consumption and investment) with the risks still tilted to the downside. Regarding inflation, the combination of a confident but cautious message was maintained. Headline inflation is heading towards the target but sticky components (services, domestic, core) are still high and some time will be needed before these fall in line