ECB Signals Cautious Easing as Lagarde Stresses Patience
Article published on February 3rd, 2025 6:15AM UK Time
The European Central Bank (ECB) delivered a widely expected 25bps rate cut, marking the first step in its policy easing cycle. The decision was unanimous, with all Governors in agreement, but ECB President Christine Lagarde made it clear that the central bank is in no rush to cut rates aggressively. Policymakers avoided any discussion of a 50bps reduction and provided no clear forward guidance on how far rates could fall, emphasizing a meeting-by-meeting, data-driven approach.
Policy Outlook: Restrictive Stance Remains
Despite initiating rate cuts, the ECB continues to view monetary policy as restrictive, with previous hikes still feeding through financial conditions. Financing remains tight, and some maturing loans are rolling over at higher rates. Lagarde acknowledged the challenge of balancing gradual disinflation with economic headwinds, reinforcing that it is too soon to determine if rates will drop below neutral levels. A revised paper on the natural interest rate, set for release on February 7th, may offer more clarity on how the ECB defines “neutral” in the current economic landscape.
Inflation and Growth: Cautious Optimism
The ECB remains confident that inflation will return to its 2% target in 2025, with wage pressures easing, a key factor in its inflation outlook. While domestic inflation remains elevated due to lingering sectoral price adjustments, the broader disinflation trend is intact. Rising government bond yields, largely driven by global spillovers from the U.S., are not expected to disrupt monetary policy transmission.
On growth, Lagarde dismissed concerns about stagnation, saying that policymakers did not even discuss it. She acknowledged that while the economy has yet to reach its full potential, there are early signs of recovery, with consumption expected to pick up as restrictive policies gradually ease.
Market Reaction and Risks Ahead
Market reaction was muted, with EUR and EGBs largely unchanged following the announcement. However, rate expectations have adjusted only slightly, with traders now pricing in three full rate cuts into the end of the year. This was helped by cooler German inflation readings out last Friday. This cooling inflation was offset a little by the ECB’s Survey of Profession Forecasters who saw inflation at 2.1% for 2025 which was up up from the prior of 1.9%.
Looking ahead, the ECB’s meeting-by-meeting stance means markets will remain highly sensitive to incoming data, wage growth trends, and fiscal policy developments. The release of next week’s ECB tracker will be closely watched for further insights into policymakers’ thinking.
Final Thought: A Measured Approach to Easing
While the ECB has initiated its rate-cutting cycle, Lagarde’s messaging was clear and measured—this is not a rush to lower rates, but rather a gradual recalibration. The ECB remains focused on ensuring inflation stays on its downward trajectory while carefully managing economic risks. As a result, investors should expect continued uncertainty over the speed and scale of rate cuts, with upcoming data playing a crucial role in shaping expectations.
