For those of you who, like us, were expecting the ECB’s monetary policy meeting to provide visibility on the future pace of rate cuts, you’ve missed out once again.
As widely expected, the ECB lowered the deposit rate by 25 bps to 3.5%. As announced in March, the ECB also took advantage of the meeting to reduce the “corridor” between its various key rates. The marginal rate and the refinancing rate were thus lowered by 60 bps. This “modification of the operational framework” has little immediate impact, other than to reduce the potential volatility of monetary rates (Euribor, €STR) and better control the short-term market. This decision is also a “pre-emptive adjustment”: for the time being, the deposit rate remains the ECB’s main monetary policy instrument, as the zone’s banks have held €3,000 billion in excess liquidity since the massive injections carried out during the Covid period. However, this excess liquidity is set to diminish, leading banks to borrow again in the future, which should re-establish the refinancing rate as the central bank’s reference rate.
As for the outlook, it’s not much more exciting… Christine Lagarde is clinging to the notion of “data dependence” and is therefore refusing to give any more visibility on the future pace of rate cuts, given that the next monetary policy meeting is barely a month away. Will the data have fundamentally changed by then? Not for sure. However, despite the persistent risk to the service component of inflation, with wages remaining “too dynamic” and outstripping productivity gains, ECB members are increasingly confident in the disinflationary trend, and there seems to be no real reason against further easing, with the possible exception of the end of the negative contribution of oil prices to inflation statistics by the end of the year.
Across the Atlantic, the Fed’s monetary policy meeting on Wednesday is likely to be more exciting. If a cut is a foregone conclusion, the market still doesn’t know which way to turn. For investors, a 50 bps cut now seems to hold the key (implied probability of 60% vs. 30% a week ago). While such a cut may be fundamentally justifiable (Fed funds are well above inflation, which implies considerable room for manoeuvre), in terms of image, it may be questionable. As we mentioned in our last issue on Monday, the Fed must not give the impression of over-reacting to the economic slowdown. In any case, Jerome Powell will have to be skilful when he speaks to justify the FOMC’s decision. In the medium term, this cycle of rate cuts should be favourable for equities (see this week’s chart), excluding recessions…
