ECB Cuts to 2%, Signals End Phase of Rate Cycle Amid Trade Uncertainty
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The European Central Bank delivered a widely expected 25 basis point rate cut, lowering the deposit rate to 2%, in line with market pricing of 24.6 bps for the June meeting. While the staff forecasts appeared dovish, the tone of the press conference leaned more hawkish, leading many to interpret the move as a hawkish rate cut.
With a terminal rate now seen at 1.75%, this implies the possibility of just one more rate cut ahead. Notably, the ECB also shared a scenario analysis, reflecting the heightened uncertainty stemming from global trade tensions.
Economic Projections
The central bank lowered its 2026 inflation forecast to 1.6%, indicating a temporary dip, while the 2027 projection remains steady at 2%. Although the statement sounded slightly less concerned than in April, officials still see downside risks to growth.
Press Conference Insights A key moment came when President Lagarde noted the ECB is "getting towards the end of the monetary policy cycle" and that the cycle is "just nearly concluded," though she stopped short of confirming a pause. Another surprise was that one Governing Council member did not support the decision. As the press conference progressed, traders scaled back expectations for another ECB rate cut this year.
ECB Sources Unlike last time, source comments emerged after Lagarde's press conference. They revealed that some ECB officials are leaning toward pausing rate cuts in July, while others remain open to a possible move in September. Some even believe the cutting cycle might already be complete. Lagarde reiterated that the policy is well-positioned to handle trade-driven uncertainty following the decision to lower the deposit rate to 2%.
Key Takeaways The ECB cut rates by 25bps to 2%, aligning with expectations but delivered with a hawkish tone. Dovish staff forecasts were offset by cautious press conference remarks, and internal division emerged with one dissenting vote. The ECB introduced scenario analysis to address trade uncertainty. While some officials are open to more easing, the tone suggests the rate-cutting cycle may be nearing its end.