MNI ECB WATCH: Future Rate Path In Focus After June Cut

The European Central Bank is set to cut key interest rates 25 basis points to 3.75% on Thursday, its first reduction since 2019, and issue projections broadly confirming the outlook seen in March, with market focus on hints of additional cuts amid an uncertain environment.

The Governing Council will stress that it is persisting with its meeting-by-meeting and data dependent-approach, eschewing clear guidance on its future rate path, particularly given elevated uncertainty over geopolitics and U.S. monetary policy, but President Christine Lagarde could indicate that more easing is likely by the September meeting, in an echo of the signalling leading up to this week’s impending cut. (See MNI SOURCES: ECB To Hold In July, Signal Likely September Cut)

June's projections, prepared by national central banks, look set to be little changed from March's, with almost identical rate path assumptions. While they could contain slight upgrades to growth and inflation to reflect eurozone's relatively strong first quarter, they should continue to indicate the mid-2025 landing zone for achieving the 2% target.

Officials who have spoken to MNI expect from 50-75 basis points in cuts this year. (See MNI SOURCES: Fed, Geopolitics, Feed ECB Caution Over Cuts)

While Bank of Italy Governor Fabio Panetta and Bank of Portugal Governor Mario Centeno have warned of the dangers of cutting too slowly and noted that latest inflation and wages data have been consistent with the March projections, more cautious signals have come from other Governing Council members. Bundesbank President Joachim Nagel has said a second cut should not come before September, while hawkish Executive Board member Isabel Schnabel has warned of a "bumpy" disinflation process, particularly with regards to services prices.

Bank of Latvia Governor Martins Kazaks has also warned of a “bumpy” last mile before reaching the inflation target, telling an MNI Connect event that a cut in June would reverse the “insurance hike” of September 2023 but that there is no assured subsequent rate path.