- The ECB’s policy decision to cut 25bp was unanimously expected by markets and analysts, and furthermore there were no new policy signals.
- Incoming information since the December meeting supported the economic and inflation assessment in the ECB’s December baseline, with an unchanged risk assessment. Hence, today’s press conference will not be remembered as a key one. However, in the current environment, boring is good.
- Markets traded in a tight range through the press conference, and following the pre-meeting rally, markets are now discounting another 71bp of rate cuts this year. Markets rallied somewhat again after the end of the press conference.
No change in the macroeconomic assessment
The ECB’s characterisation of the economy was a stagnating one that is set to remain weak in the near term as manufacturing continues to contract while services are expanding. The near-term weakness was noted due to fragile consumer confidence and households not getting sufficient encouragement from rising real rates, albeit with a robust yet softening labour market there are reasons to expect a recovery later this year, provided that trade tensions do not escalate. Also, rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time. Overall, risks to growth remains tilted to the downside, with the risk assessment wording essentially unchanged. On inflation, the ECB stated that ‘Most measures of underlying inflation suggest that inflation will settle at around the target on a sustained basis. Domestic inflation remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay’.
Direction is clear – end point unknown
During the press conference Lagarde said that today’s decision to cut 25bp was a unanimous decision that all rallied behind. Looking ahead, the ECB is on route to deliver another rate cut at the March meeting, yet when asked the important question on where the cutting cycle will end, Lagarde didn’t give any signals. However she did say that next week, on 7 February, ECB staff will publish a revision of r* estimates. For now, the ECB’s monetary policy stance remains restrictive, and they are not at neutral – an acknowledgment from Lagarde as well. It is an ‘entirely premature’ debate according to Lagarde.
