Van Lanschot Kempen: ECB keeps all options open
By Joost van Leenders, Senior Investment Strategist at Van Lanschot Kempen
- ECB cuts rates by another 25 basis points
- Lagarde sees exceptional uncertainty
- All options open
Last month I wrote that the ECB had opened the door for a pause. However, the trade war unleashed by the US has darkened the growth outlook and has raised uncertainty. Moreover, inflation fell further in March. Headline to 2.2% and core to 2.4%. For core inflation this was the lowest level since the inflation shock caused by the corona pandemic. Encouragingly, services inflation, the stickiest part of inflation, fell to 3.5%. Thus, the ECB’s 2% inflation goal is getting in sight.
Markets had reassessed their expectations towards a 25 basis points rate cut at this meeting and the ECB did not disappoint. After today’s cut the ECB’s policy rate has been cut cumulatively by 175 basis points to 2.25%.
The ECB repeated that the disinflation process is well on track. It noted the recent decline in inflation and expects inflation to settle at the 2% target on a sustained basis. The growth outlook has deteriorated to exceptional uncertainty about trade policy and tightening financial conditions. The ECB was a bit more outspoken about the growth outlook than about inflation. But with a negative demand shock from the US import tariffs, the possible rerouting of trade towards Europe (without specifically mentioning China’s cheap products), the appreciation of the euro and lower energy prices, the ECB projects inflation to recede further.
The ECB no longer mentioned the restrictiveness of monetary policy. Previously, it had said that monetary policy had become meaningfully less restrictive. This led to the speculation of a pause today. ECB-president Lagarde said that an assessment of the restrictiveness is less useful in the current circumstances. The neutral rate, which is uncertain anyway, is only valid in a shock-free world, according to Lagarde. And that is obviously not the case today.
Thus, Lagarde kept all options open. She refused to give any direction of travel. The ECB will stick even more to its data-dependence and its meeting-by-meeting approach. Overall, the press statement and the press conference did not deliver any surprises, so market reactions were minimal.
The market expects two more rate cuts this year; the next one priced in July. We think this is reasonable.
