ECB embarks on rate cutting path, but at an uncertain pace

There were few surprises at the June ECB meeting. The council delivered the widely expected first rate cut, having judged that the inflation outlook had sufficiently improved to begin easing policy. But the policy statement and president Lagarde’s press conference retained a hawkish bias, with the council sticking to its data dependent, meeting by meeting approach.

What you will learn:

• New staff projections added to the hawkish tilt with the headline and core inflation forecasts for this year and next revised up more than expected reaching the 2% target only later in 2025. We remain more confident of the disinflationary trend than the ECB, but our revised forecasts now see inflation undershooting 2% only early next year rather than already in H2 this year.
• Stickiness in wages and domestic inflation remain a key worry point. Leading indicators point to good news accumulating on that front, which we think will facilitate further rate cuts later this year. But we now think that progress won’t be fast enough to reduce the ECB’s hawkish tilt sufficiently. Therefore, we expect only two more rate cuts this year, in September and December.