As expected, the European Central Bank cut interest rates by 25 basis points, but surprisingly dampened the prospects for further easing soon.
Policy makers had a near unanimous vote to cut the deposit rate to 3.75% and the key refinancing rate to 4.25% as one dissenter (Holtzmann) wanted to keep the policy unchanged.
Link to the ECB's June monetary policy decision
The European Central Bank mentioned this in its official statement “Inflation has fallen by more than 2.5 percentage points and inflation expectations have improved significantly.” Moreover, they noticed it as well “Core inflation also eased, reinforcing signs of weakening price pressures.”
The updated staff forecast showed positive revisions to growth and inflation forecasts for this year and next:
- Headline inflation is expected to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026.
- Core inflation is expected to average 2.8% in 2024, 2.2% in 2025, and 2.0% in 2026.
- Growth is expected to recover to 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026.
During the press conference, ECB Governor Christine Lagarde refrained from providing guidance on the timing of future policy moves, stressing that the ECB was not pre-committed to any particular interest rate path.
Link to the ECB press conference Q&A
When asked about market expectations for further interest rate cuts this year, Lagarde stressed her data-driven approach and explained that they also had to take into account. “How reliable and robust their (inflation) expectations are.”
Market reactions
Euro against major currencies: 5 minutes
Overlay of the Euro against major currencies Chart by TradingView
The euro was falling slightly ahead of the ECB's actual decision, as market participants were likely preparing for a downbeat statement containing more hints about future cuts.
Although the central bank cut interest rates as expected, euro bulls seem to have found a reason to rally upon seeing the improved growth and inflation outlook, suggesting that further easing is yet to come.
The common currency rose sharply across the board during what was seen as a “tough cut” announcement but gave up a little ground (and some) as the ECB meeting took place.
