Crédit Mutuel AM: Another ECB rate cut expected before a pause
The European Central Bank (ECB) is expected to cut its key interest rates once again at its June 5 meeting, marking the eighth cut within a year. This monetary policy stance takes place in the context of moderate growth and a slowdown in inflation toward the 2% target.
Our main expectations:
- Key interest rates: The Governing Council is expected to reduce the deposit rate, the main benchmark rate for markets, by 25 basis points (bps), bringing it down to 2.0%, compared to 4.0% a year earlier.
- Communication: The ECB is expected to continue basing its decisions on the evolution of economic data. During the press conference, its president, Christine Lagarde, could, in our view, hint at a pause in July, before reassessing the trajectory in September. The institution will likely emphasize that risks to the inflation trajectory remain broadly balanced in the medium term, justifying a cautious approach to monetary policy; a position recently reaffirmed by Isabel Schnabel, ECB Executive Board member known for her firmly “hawkish” stance. Furthermore, despite headwinds related to trade tensions and tariffs, the ECB is expected to consider that Eurozone growth remains resilient, supported by rising real wages and a strong labor market, two key factors underpinning household consumption.
- Economic forecasts: In its new projections, the ECB is not expected to make significant changes to its growth forecasts for 2025-2027 compared to those of March: under its baseline scenario it anticipated growth of 0.9%, 1.2%, and 1.3% for 2025, 2026 and 2027 respectively. On inflation, the institution should confirm a faster convergence toward its 2% target beginning this year, supported by lower oil prices and the euro’s appreciation since the previous projections. These factors, combined with increased competition from China in industrial goods within the Eurozone, should also weigh on inflation forecasts for 2026 and likely 2027, estimated at 2.0% and 1.9% respectively in March. Core inflation, meanwhile, is expected to stabilize around 2% over the same period (2025-2027).
In summary:
As widely anticipated, the ECB’s rate cut in June will be another step toward a more neutral monetary policy, while maintaining a cautious approach based on economic data.
