The European Central Bank (ECB) lowered rates by 25 basis points at today’s meeting, a move that was widely expected. The Euro, which has posted impressive gains in recent weeks, is barely affected by the decision so far.
Today’s 0.25% rate cut by the ECB of all three main rates has lowered the ECB deposit rate to 2.25%, its lowest level since December 2022. The Main Refinancing Rate has been lowered from 2.65% to 2.40%. The central bank has been aggressive in its easing cycle, having cut rates by 210 basis points in just ten months.
The ECB rate statement was unambiguously optimistic about inflation. Members noted that underlying inflation is expected to settle close to the 2% target on a sustained basis. The ECB is still projecting core inflation at 2.2% in 2025, slightly above the 2% target.
Inflation Progress
One of the major reasons analysts were extremely certain that the ECB would cut rates today was the obvious progress on reducing inflation, especially long-term inflationary pressure. The ECB stated that the rate cut was “based on its updated assessment of the inflation outlook” which had “declined in March”. Perhaps the most crucial language used today was “the disinflation process is well on track”. Finally, the ECB noted that “wage growth (is) moderating”, which is crucial for the lowering outlook.
Trump Tariffs Effect
One of the key factors that is reducing inflationary pressure in the short-term at least is Trump’s threat to impose 20%> tariffs on imports from the EU by this summer, if a better deal is not negotiated between the parties by then, which would certainly require some concessions on other issues which the EU will likely be unwilling to make. However, the chilling effect of the 10% tariff and the threatened larger tariff is certainly enough to cool wage-driven and other inflationary pressures, with the ECB quoting “uncertainty”. The ECB’s statement pointed out that “the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions” which adds credit conditions to the list of reasons a cut was required today.
European Markets Barely React After ECB Decision
In the aftermath of the ECB rate decision, the EUR/USD currency pair is up 0.22% and the EUR/JPY currency cross is also a bit higher.
The German DAX 40 Index and the French CAC 40 Index are slightly higher.
It does not look as though the widely expected rate decision and statement language have moved markets in any meaningful way yet.
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