The European Central Bank (ECB) has announced its interest rate decision, opting to cut all three key rates by 25 basis points. As a result, the deposit facility rate was reduced to 3.25%, while the main refinancing operations rate and the marginal lending facility were lowered to 3.4% and 3.65%, respectively.
The decision statement emphasized that the rate cut was driven by the Governing Council’s updated assessment of the inflation outlook and inflation dynamics. The information received on inflation suggests the disinflation process is on the right track. However, a rebound in inflation is expected in the coming months, though it is forecasted to return to the target rate next year.
The statement highlighted that financing conditions remain restrictive and will continue to be kept sufficiently tight until inflation returns to the target. It also noted that the recent downside surprises have influenced the current inflation outlook in economic indicators.
The ECB made this second consecutive cut following weak growth in the Eurozone and a sharp decline in inflation. The decision was in line with market expectations.
Market reactions have been limited so far, but investors are now waiting for President Christine Lagarde’s press conference to gain further clues about the future policy path. However, Lagarde is expected to remain tight-lipped.
Economic activity in the Eurozone continues to contract, and given the deteriorating economic outlook, markets have almost fully priced in further quarter-point rate cuts by the ECB through March. By the July-September period, the ECB is expected to bring rates down to 2%.
If Lagarde adopts a dovish tone during her speech, this could increase downward pressure on the euro, potentially strengthening the bearish trend in the EURUSD pair.