Retaining optionality – Deutsche Bank

As expected, the ECB cut the deposit facility rate by 25bp to 3.50%. This was an uncontentious and unanimous decision by the Governing Council. Also as expected, the ECB is coy about what happens next. The ECB continues to avoid explicit guidance and retains optionality on the sequence and scale of this easing cycle, Deutsche Bank’s macro analysts note.

ECB to cut the deposit rate 25bp in December

“There is uncertainty and the ECB does not want to commit itself to any particular path for policy. The market is growing more sceptical about growth and inflation and is pricing a more aggressive easing cycle, with faster cuts to a terminal rate slightly below neutral. The ECB is not convinced. Domestic inflation remains elevated and the case for domestic recovery can still be made. More significant downgrades would be necessary in December to justify market pricing.”

“The ECB is neither ruling in nor ruling out a rate cut at the next Governing Council meeting in October, but the impression is it is not very likely. The ECB will have a lot more information available at the December meeting. It will also know the outcome of the US election in December – and hence whether Europe is facing Trump’s proposed tariffs or not. A trade war would significantly weaken the outlook for 2025. This is one of many sources of significant uncertainty.”

“Our baseline remains unchanged. We expect the ECB to cut the deposit rate 25bp in December and continue at the pace of 25bp per quarter until it reaches a terminal rate landing zone of 2.00-2.50%, broadly in line with neutral, around the end of 2025. The risks are clearly skewed towards the ECB normalising monetary policy more rapidly than this. However, it’s still not obvious to us that policy rates need to go below neutral and certainly not far below neutral. Much will depend on fiscal policy.”