ECB: Getting Closer But Not There Yet...

... while April Remains a 'Live' Meeting

The ECB cut the Deposit Rate by 25bp to 2.50%, as widely expected, noting that the disinflation process remains well on track.

We highlighted in the last 'Pinpoint Perspectives' (3rd March) that ‘restrictiveness’ was moving into focus and compromise language at this meeting could not be excluded in light of recent comments from Council hawks and the ECB Accounts.

We also thought that if there was such a change, the Council would need to continue to stress that it is a following a data-dependent and meeting-by-meeting approach to avoid explicitly ruling out an April cut.

The ECB obliged on both fronts.

Indeed, the ECB Statement noted that “monetary policy is becoming meaningfully less restrictive” (Jan: “monetary policy remains restrictive”), whilst both the Statement and Lagarde in Q&A reiterated data dependence and a meeting-by-meeting approach.

The new formulation (“becoming meaningfully less restrictive”) is arguably a touch more hawkish than it could have been, although use of “becoming” hints that the ECB is not yet done with cutting rates.

It suggests to us that at the current juncture, the Governing Council thinks that the terminal rate is getting closer, but has not yet been reached.

Our judgement is that the Council consensus probably has in mind around 2% (ie the mid-point of the recent 1.75%-2.25% ‘indicative’ range in the recent ECB staff paper).

Also noteworthy today was the addition that “especially in current conditions of rising uncertainty…” the Council would follow a data-dependent and meeting-by-meeting approach.

Lagarde stressed this many times in Q&A (ie there are “risks all over” and “we will be, as ever - and more so - data dependent.”)

In particular, she said rising uncertainty meant:

“If the data indicate to us that in order to reach destination the appropriate monetary policy is to cut, then we will do so. On the other hand, if the data indicate that we shouldn’t cut, then we shall pause.”

All this is perhaps fairly unsurprising, given the growing uncertainty from Trump’s tariffs threats (likely negative for growth and medium-term disinflationary), but now also the significant developments from the evolving shift in German fiscal policy (potentially resulting in stronger growth and medium-term inflation).

Increased caution from the ECB in the face of rising uncertainty implies that whilst a rate cut in April is not a done deal, it remains a ‘live’ meeting, and will depend on both the incoming data as well as the news flow in the coming days and weeks.

Quite simply, as also recognised by Lagarde, at this particular moment in history, a lot can change (and is) in just a couple of days, let alone six weeks...

ECB Staff Projections

• Growth

The ECB staff projections revised down the GDP growth f/c by -0.2pp for both this year and next, to 0.9% in 2025 and 1.2% in 2026, while the f/c for 2027 was unrevised at 1.3%.

In addition, risks to economic growth are judged to “remain tilted to the downside.”

Indeed, the ECB expects Q1 2025 GDP to expand 0.2% q/q.

Although nudged down from the previous expectation (0.3%), it still looks a bit too optimistic relative to survey data, pointing to ongoing downside risks (at least in the short-term) to the ECB’s GDP f/c.

However, as Lagarde noted in Q&A, we shall need to watch carefully the details of all the evolving geopolitical events (tariffs, German fiscal policy, EU security arrangements etc) to ascertain how risks are likely to evolve beyond the short-term.

• Inflation

The ECB continues to note that the disinflation process is well on track and inflation has continued to develop broadly as staff expected.

The latest projections were said to “closely align” with the previous inflation outlook.

The Headline HICP inflation f/c was revised up 0.2pp to 2.3% in 2025 (primarily due to Energy), while it was unrevised at 1.9% for 2026 and was revised down 0.1pp to 2.0% for 2027.

The quarterly profile showed headline inflation returning to 2.0% only in Q1 2026, versus Q4 2025 in the Dec projections.

The Core inflation f/c was revised down by -0.1pp to 2.2% in 2025 (reflecting softer recent data), while it was nudged up 0.1pp to 2.0% in 2026 (on account of a weaker EUR and upwards revision to 2025 ULCs) and unrevised at 1.9% in 2027.

Core inflation is not seen returning to 2.0% until Q3 2026, one quarter later than in the previous forecast round.