CORRECTED-MNI ECB WATCH: ECB Cuts By 25BP

(Corrects Lagarde's reference to the neutral rate in paragraph five)

The European Central Bank cut its key interest rate by 25 basis points on Thursday but its projections anticipated slightly higher inflation in 2024 and 2025 than the last round in March, with President Christine Lagarde warning that the prices outlook was likely to be “bumpy” over the next few months.

There is “a strong likelihood” that the ECB’s first cut since September 2019, made after one governor dissented, will not be a one-off, Lagarde said, adding that the Governing Council’s “overall confidence in the path ahead has increased over recent months” as it has gained confidence in its projections.

But the president declined to confirm that the central bank had moved into a “dialing back” phase of interest rate reductions, stressing rather the ECB’s data-dependence and adding that data will be required “at each and every point in time” to confirm a disinflationary trend. (See MNI SOURCES: ECB To Hold In July, Signal Likely September Cut)

June’s macroeconomic projections saw the outlook for prices increase from the previous projections in March, with headline inflation seen averaging 2.5% in 2024 and 2.2% in 2025, and with the headline rate converging to 2% only in 2026. Core inflation was also seen higher, at 2.8% in in 2024 and 2.2% in 2025.

MODERATING RESTRICTION

In its statement, the ECB referred to the cut as “moderating” the degree of monetary restriction, and Lagarde said said that if the neutral rate increased during Covid, the current level remains a long way from that level, though without revealing any estimate of r*.

While Lagarde said one governor voted against Thursday’s decision, she provided no details as to the identity or preferences of the dissenter and noted that there was unanimity in continuing to make data-dependent and meeting-by-meeting policy decisions.

The projections were more optimistic for growth in 2024, seen at 0.9%, with the economy seen expanding by 1.4% and 1.6% in the two subsequent years.

ECB Vice President Luis de Guindos will discuss the projections and the thinking behind the latest decision at an MNI Connect livestream event on June 12. Register for the event here