ECB update: Paused-ish – but in a good place with Lagarde still in charge

The economist view: Paused-ish

As expected, the European Central Bank (ECB) cut rates by 25bps. The bank continues to take a “data-dependent”, “meeting-by-meeting” approach and continues to send a message that they are not pre-committed to a particular path. However, throughout the press conference, ECB President Christine Lagarde repeatedly peppered references to them being in a good position/well positioned/in a good place after Thursday’s rate cut (especially in the context of being well-positioned to navigate uncertainties). With downside risks to growth and plenty of uncertainty, it was perhaps not surprising that Lagarde didn’t signal an ‘on hold’ stance any more firmly than that, and a couple of times made comments to the effect that they were “nearly” at the end of a monetary policy cycle/“getting to” the end (rather than saying they were “likely at the end” or something similar).

Updated staff forecasts for CPI are revised down for 2025 and 2026, but largely reflecting energy prices and a stronger euro. The 2027 forecast and core inflation forecasts are broadly unchanged, with the latter a touch below the 2% target in 2026 and 2027.

With downside risks to growth and plenty of uncertainty, it was perhaps not surprising that Lagarde didn’t signal an ‘on hold’ stance.

The ECB’s forecast for 2025 GDP growth is unchanged, with stronger-than-expected data in Q1 offset by a weaker outlook (with uncertainty around trade policy expected to weigh). Beyond 2025, fiscal policy is expected to be more supportive with the staff GDP forecast at 1.3% in 2027 compared to 0.9% in 2025. Still, it continues to see risks to economic growth as tilted to the downside.

The discussion in the statement on risks to inflation reads fairly two-sided. They have both upside and downside (trade policy-centric) scenarios. Wages are continuing to “moderate visibly”, but they are less worried about financing conditions tightening in response to trade tensions and Lagarde also commented that they spent a considerable amount of time discussing possible supply chain disruptions (which aren’t in those main scenarios). Lagarde commented later that the outlook for inflation is “more uncertain than usual”.

On a different note, Lagarde confirmed a couple of times that she was determined to complete her term (this follows reports that she may leave the ECB early to take up leadership of the World Economic Forum) – while incidentally also wearing a necklace with the words “in charge” on it.

I am happy for now to continue to pencil in one further rate cut from the ECB this year. That cut looks more likely to come later in the year given the soft pause messaging from the press conference.

The fund manager view: In a good place with Lagarde still in charge

Expectations for policy action at the June meeting of the ECB’s Governing Council were very clear – it would cut rates once again, with the focus turning to “what next?”. Having halved the deposit rate from its peak to 2%, would the bank signal that the cutting cycle was over? Would revised inflation forecasts allow it to declare victory in the battle against inflation? To what extent was the Council in agreement on the future path of monetary policy?

Once the press conference began, it became clear that any expectation of a signal towards a ninth consecutive rate cut when the council meets in seven weeks’ time was misplaced.

In addition to delivering the widely anticipated 25bps (0.25%) rate cut, revised forecasts showed that the ECB was now expecting annual inflation to be 0.3% lower in both 2025 and 2026 than had been the case just three months ago, at 2.0% and 1.6% respectively, not returning to its 2.0% target until 2027. The knee-jerk reaction by the market was to interpret this as a dovish signal, with short end yields falling in anticipation of further policy easing. However, once the press conference began, it became clear that any expectation of a signal towards a ninth consecutive rate cut when the council meets in seven weeks’ time was misplaced.

The messaging from ECB President Christine Lagarde was clear – the drivers of the forecasted undershoot in inflation for 2026 were the strong euro and weaker energy prices, and these were not enough to warrant concern that rates were overly restrictive. At this stage the bank remains in data dependent mode. Lagarde repeatedly stated that monetary policy was currently in a “good place” and that the bank’s forecast of underlying core inflation of 1.9% for 2026 and 2027 was unchanged. She was pressed several times on whether the market can expect further cuts, a pause in July or whether the cutting cycle was now over, and each time gave a response indicating that, of right now, rates are where the bank wants them to be in order meet inflation goals.

The mantra of a meeting-by-meeting approach with no pre-commitment to a particular rate path was once again included in the press release and repeated by Lagarde in the press conference.

That is not to say that rates may not need to be cut again, but this will very much depend on incoming data, as well as trade tensions; where tariffs eventually settle and any retaliatory action on tariffs. The rates effectively no longer have a firm “direction of travel” as the final destination is close, and the notion of a neutral rate was once again dismissed by Lagarde, as not applicable in the current uncertain global environment given ongoing economic shocks.

Sporting a necklace emblazoned with the words, “in-charge” and dismissing any market rumours of ending her tenure as ECB President early, Lagarde left the market, perhaps, disappointed by the absence of a signal that further rate cuts were coming, with yields rising over the course of her press conference. However, in our view, her approach was entirely justifiable. We are currently operating in an environment of heightened uncertainty, global trade tensions and fractious global geopolitics. Against this backdrop, and with models forecasting inflation targets to be met, it would be imprudent to commit to future policy decisions and, like the ECB, we remain well positioned to react to incoming data and any associated market opportunities

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