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ECB delivers a “hawkish” rate cut, Lagarde stresses data dependency

President of European Central Bank Christine Lagarde attends a press conference after a meeting of the ECB's governing council in Frankfurt, Germany, Thursday, June 6, 2024.
President of European Central Bank Christine Lagarde attends a press conference after a meeting of the ECB's governing council in Frankfurt, Germany, Thursday, June 6, 2024. Copyright Michael Probst/Copyright 2024 The AP. All rights reserved
Copyright Michael Probst/Copyright 2024 The AP. All rights reserved
By Piero Cingari
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The ECB reduced interest rates by 25 basis points, signalling a moderation in monetary policy restrictions. However, Frankfurt also issued an upward revision to its inflation projections, now expecting headline inflation to average 2.5% in 2024 and 2.2% in 2025.

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The European Central Bank (ECB) reduced interest rates by 25 basis points during its June meeting, a move largely anticipated by market participants following prior communications from Frankfurt policymakers over the past month.

In the policy statement, the ECB affirmed that it is appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady. The new interest rates are set at 4.25% for main refinancing operations, 4.5% for the marginal lending facility, and 3.75% for the deposit facility.

"We decided to cut because overall our confidence in the path ahead has been increasing over the last months," President Christine Lagarde affirmed at the press conference.

Lagarde noted that the ECB decision was unanimous except for one Governor. The ECB President stressed that this is not yet a "dialing back" phase of interest rates, but rather a "moderation in the level of restriction," emphasising the need for more data and analysis to confirm the disinflationary path.

"There will be bumps on the road towards the 2% inflation target," Lagarde said.

When questioned about market expectations of further ECB rate cuts by the year's end, Lagarde responded: "Markets do what markets have to do, and we do what we have to do."

On the potential for a July rate cut, Lagarde gave a subtle answer: "We will have more data when we have projection meetings," hinting that September might be the next significant meeting for rate decisions.

The ECB reiterated its commitment to keeping policy rates sufficiently restrictive for as long as necessary to achieve the 2% inflation target, stating that future policy decisions will be data dependent, following a meeting-by-meeting approach.

"The Governing Council is not pre-committing to a particular rate path," the ECB remarked in the statement.

“Hawkish” revisions to inflation projections

The ECB's statement reveals that headline inflation has decreased by 2.5 percentage points since September 2023, and that "the outlook has improved markedly."

Nonetheless, Frankfurt cautioned that despite these improvements, "domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year."

In its June staff macroeconomic projections, the ECB adjusted its inflation forecasts upwards for 2024 and 2025.

Headline inflation is now expected to average 2.5% in 2024 (an increase of 0.2 percentage points from March), 2.2% in 2025 (up by 0.2 percentage points from March), and 1.9% in 2026 (unchanged from March).

Core inflation projections have also been revised upwards by 0.2 percentage points to 2.8% for this year. Projections for 2025 have been raised by 0.1 percentage points to 2.1%, while those for 2026 remain unchanged at 2.0%.

Economic growth expected to pick up

Economic growth in the eurozone is expected to average 0.9% in 2024 (up from a 0.6% projection in March), 1.4% in 2025 (down from 1.5% earlier), and 1.6% in 2026 (unchanged).

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"After five quarters of stagnation, the euro area economy grew by 0.3% over the first quarter of 2024," Lagarde indicated.

The services sector is expanding, and manufacturing is showing signs of stabilisation at low levels.

The ECB expects the economy to continue to recover as higher wages and improved terms of trade push up real incomes. Stronger exports should also support growth over the coming quarters as global demand for goods and services rises.

Additionally, monetary policy should exert less of a drag on demand.

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Lagarde highlighted that “an effective, speedy and full implementation of the Next Generation EU program, progress towards capital market unions and the completion of banking union and the strengthening of the single market would help foster innovation and increase investment in the green and digital transitions.”

Market reactions

The Euro strengthened following the ECB decision, with the EUR/USD pair rising to 1.0880, also supported by the release of a higher-than-expected increase in US jobless claims last week.

Euro area sovereign bond yields increased by about 4 basis points across the board, with Bund yields climbing to 2.55%, set to break a three-session losing streak.

The broader Euro Stoxx 600 index hit fresh record highs during morning trading, but European equities slightly trimmed session gains after the ECB decision. Investor enthusiasm over the rate cut was tempered by the higher inflation projections.

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Madrid and Milan outperformed other markets, each up 0.6% at 15:50 CET, while Paris and Frankfurt both rose by 0.1%.

Among large-cap stocks, the top daily gainers were SAP (up 4.1%), Fresenius (up 2.4%), and UniCredit (up 1.9%).

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