Rates decision. As widely telegraphed, the ECB cut the three key interest rates by 25bp, leaving the Deposit Facility rate at 2.75%, the Main Refinancing Operation (MRO) rate at 2.90% and the Marginal Lending Facility (MLF) rate at 3.15%.
Regarding forward guidance: i) the ECB maintained the “data-dependent” and “meeting-by-meeting” rhetoric. It also retained its cautious undertone regarding future actions. In the March meeting the ECB’s GC will arguably manage updated estimates on the natural rate in addition to further evidence of the performance of macro variables in 1Q25. We think it very likely that the ECB will be more vocal/explicit with regard to the future pace of rate cuts by the March meeting
Macro assessment and staff projections: we haven’t seen any major change in the ECB’s overall macro assessment: regarding growth, the broader picture is that of an ongoing low profile that should gradually gain momentum in the quarters ahead (solid job market and higher incomes should boost demand) without overlooking the important headwinds that still loom; iii) As for inflation, the claim that the "inflation process is well on track” remains the main mantra.
Our view:
- i) we see more room for additional cuts in 1Q25 (25bp in March). Looking in-depth at President Lagarde’s comments today, we almost see some risk that our view of the natural rate around 2.50% may be a bit too high. In any case, any word-by-word analysis of Lagarde’s speech may be revised after there is more information regarding the ECB’s models in February.
- ii) if the natural rate is somewhere below our previous estimates, the room for rate cuts in 1H25 may be higher than previously expected (25bp?); In any event, as rates approach neutral, the need for consecutive/systematic rate cuts will decrease in the future (after March);
iii) while awaiting the ECB’s “material" on the natural rate on 7 February, we now think there is more of a chance that the DFR may be slightly below (25bp) 2.50% by June 2025, and this may also be the case by YE25.