ECB Preview: 8th Rate Cut In A Row

As UBS economist Paul Donovan writes this morning, a total of 52 out of 52 surveyed economists – not to mention markets – expect a quarter point ECB rate reduction today, the 8th in a row, adding rhetorically “How could so many economists possibly be wrong?” More to the point, he adds that President Trump is likely to become even more irate after criticizing the Federal Reserve for not cutting rates. 

Rhetorical questions aside, here is what to expected, courtesy of Newsquawk

OVERVIEW: Given the uncertainties surrounding the trade outlook and progress on the inflation front, the ECB is expected to cut the  deposit Rate by 25bps to 2.00%. With a rate reduction nailed on, focus will be on any hints over future easing plans. While Lagarde might not make any explicit mention of the future policy direction, any signs of dissent, whether via remarks by the President or sources after the meeting, could provide a guiding star for markets. Currently, markets see a total of 54bps of loosening by year-end (including the expected June cut).

PRIOR MEETING: Aprilʼs meeting saw a 25bps cut as expected and the old language around restrictiveness was removed. This took the ECB to the top end of its 1.75-2.25% neutral rate estimate. Accompanying forward guidance was unsurprisingly non-committal, though the statement did highlight increased uncertainty and an associated confidence impact that is “likely to have a tightening impact on financing conditions”; on this, participants were attentive to any hints around an offsetting policy response (i.e. dovish action). Just after the meeting, sources reported the decision to cut was unanimous. Lagarde didnʼt add too much, aside from stressing no argument was made for 50bps or other stimulus, though she made the point that they are viewing tariffs as a demand shock.

RECENT ECONOMIC DEVELOPMENTS : Flash inflation data for May saw Y/Y HICP decline to 1.9% from 2.2% (below target for the first time since September 2024). Core inflation declined to 2.4% from 2.7%, whilst services inflation saw a notable fall to 3.7% from 4.0%. The ECB Consumer Expectations Survey for April saw the 12-month ahead metric rise to 3.1% from 2.9%. In terms of market gauges, the EZ 5y5y inflation forward has ticked higher to 2.06% vs. circa 2.03% at the time of the prior meeting. On the growth front, Q1 GDP is currently estimated at 0.3% Q/Q vs. the Q4 print of 0.2%. More timely survey data from S&P Global showed manufacturing PMI for May climbed to 49.4 from 49.0, services slipped to 48.9 from 50.1, leaving the composite at 49.5 vs. prev. 50.4. The accompanying release noted “the eurozone economy just cannot seem to find its footing”. The unemployment rate remains at the historic low of 6.2%.

RECENT COMMUNICATIONS: Since the prior meeting, President Lagarde has remarked that levies are probably more disinflationary than inflationary. However, the net effect of tariffs is still uncertain. Chief Economist Lane is confident that the Bankʼs task to bring inflation back to 2% is “mostly completed”, however, services inflation is “still too high”. The influential Schnabel of Germany is of the view that tariffs could be disinflationary in the short run but result in upside risk over the medium term. France’s Villeroy has stated that interest rate normalisation within the EZ is probably incomplete. Typically-dovish, Panetta of Italy has remarked that there is reduced room to cut rates further, though the macro outlook is weak and trade tensions could weigh on this. Elsewhere, Cyprus’ Patsalides has noted that a 50bp cut would only be justified if recession risks intensified with stronger disinflation. At the hawkish end of the spectrum, Austriaʼs Holzmann thinks the Bank should not lower rates in June or July.

RATES: Consensus looks for the ECB to cut rates by 25bps with markets assigning a 95% chance of such an outcome. Since the prior meeting, whilst there has been an easing of tensions between the US and China, which led to an improvement in the global trade outlook, a deal between the EU and the US remains elusive. The lack of progress prompted US President Trump to recommend a 50% tariff on the EU as of June 1st. This threat has since been pushed back to July 9th and the EU is increasing efforts to get an agreement. However, large gaps between the two sides remain and the growth outlook remains uncertain. Furthermore, as detailed above, progress on the inflation front means that policymakers have the green light to ease policy (also aided by the stronger EUR and declining oil prices). Assuming the ECB cuts by 25bps this week, the focus will be on any clues as to what comes thereafter, given the apparent split of views on the GC. The accounts of the ECB meeting (albeit when trade tensions were higher) showed that some members would have been comfortable with a 50bps reduction. Some of the more hawkish members on the GC may opt to dissent to the decision with Holzmann of the view that the ECB should not cut rates in June or July. Currently, markets see a total of 54bps of loosening by year-end (including the expected June cut).

MACRO PROJECTIONS: For the accompanying macro projections, Rabobank expects growth to be revised down a touch for both 2025 and 2026 while the inflation view is likely to be trimmed for 2025 to 2.0% (Mar. 2.3%) but increased for 2026 to 2.3% (Mar. 2.0%).

HICP INFLATION:

• 2025: 2.3%
• 2026: 1.9%
• 2027: 2.0%

HICP CORE INFLATION (EX-ENERGY & FOOD):

• 2025: 2.2%
• 2026: 2.0%
• 2027: 1.9%

GDP:

• 2025: 0.9%
• 2026: 1.2%
• 2027: 1.3%