MFS: ECB cuts interest rates in September and then hits pause button

MFS: ECB cuts interest rates in September and then hits pause button

22 juli 2025

Rente ECB

Peter Goves, government bond expert at MFS, looks ahead to this week's ECB meeting:

'We expect no change in the ECB’s policy rate at 2.00% when the General Council meets on Thursday. The ECB remains in data dependent mode taking a meeting-by-meeting approach. Furthermore, the outcome of the EU-US trade negotiations is still unknown, meaning there is no rush to confront a potentially worsening growth outlook. In fact, most indicators now point to some stabilization in activity and inflation is around the target at present.

Although uncertainties persist from trade to geopolitics, the ECB appears confident that the disinflationary process is on track. One item that is likely to be noted is the rise of the euro. Even in the accounts of the last meeting, the ECB noted how this could affect exporters’ credit demand as well as exert downward pressure on inflation in the near term.

Overall, the central bank is likely to stress this is a temporary and “manageable” undershoot but that they are alert to downside risks. We pencil in one more cut, probably at the September meeting, taking the depo rate to 1.75%. By then, the ECB will hopefully have some more clarity on the US trade negotiations.

We are also mindful of the strength of the euro and the possible rerouting of Chinese goods having downside effects on inflation which the ECB will be monitoring. However, pending a trade deal that doesn’t significantly dent the growth outlook, the support from German fiscal should aid the medium-term outlook. Under this scenario, the ECB could increasingly signal a “long pause” in the rate around 1.75% which is looking like the terminal level for this cycle based on current information.

The market is priced for a hold this week in what could be something of a non-event for markets. Money markets are also priced for one more cut. This therefore leaves us much more neutral on German rates here which we think are broadly range bound here, especially in the front-end.

Indeed, 5yr rates have oscillated about 2.00%-2.50% for much of 2025. Unless there is a significant change in the fundamental outlook, this would appear fair to us. As a corollary, much of the steepening would therefore also appear behind us and with rates more range bound, the key strategy (at least over the summer) would be to hunt out carry on the curve and in EGB spread markets.'

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