European Central Bank continues rate cut cycle
Summary
The European Central Bank (ECB), in a widely expected decision, lowered its Deposit Rate by 25 bps to 2.00% at today's announcement, while its accompanying statement contained both dovish elements and some more constructive elements.
The ECB noted that current conditions were exceptionally uncertain, while also observing a deceleration in underlying inflation pressures and wage growth. While the ECB offered limited policy guidance for the meetings ahead, ECB President Lagarde did say the central bank was “getting to the end of a monetary policy cycle.”
The ECB also provided updated economic projections. The central bank's GDP growth forecasts were little changed. Regarding prices, the forecasts for headline inflation were lowered on the back of reduced oil prices and a stronger euro. There was little change to the ECB's underlying (CPI ex food and energy) forecasts, although a projection of 1.9% for both 2026 and 2027 suggests, in our view, the ECB maintains a modest easing bias.
We think today's monetary policy announcement supports further monetary easing, though it does not alter our view on the likely pace of ECB rate cuts. We expect a pause from the ECB at its July meeting and a 25 bps rate cut by the ECB in September, which would take the Deposit Rate to 1.75%. While we think the risks are likely tilted toward a more pronounced easing cycle, we do not yet see compelling enough evidence for the ECB to hasten or add to its rate cut cycle.
Author
Wells Fargo Research Team
Wells Fargo
