ECB Follows Through on Plans to Cut Interest Rates by 25 Basis Points

The ECB cut all three interest rates by 25 basis points as expected but reiterated it will not follow a predetermined rate path and will remain data dependent in future meetings. The central bank continued to stress that wage growth and services inflation require more attention but achieved the necessary conviction to lower rates given the fact that inflation has fallen 2.5% since September with the outlook improving.

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Updated staff projections revealed upward revisions to both inflation and growth in 2024 which spurred on the euro in the aftermath of the statement. The all-important medium term measure of inflation (2026) remained unchanged at 1.9% but remains under the 2% marker importantly, which is likely to help anchor inflation expectations. 2024 GDP was revised higher, from 0.6% to 0.9% which will serve as some good news for an economy that has stagnated for the last five quarters.

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Immediate Market Reaction

Markets reduced their rate cut bets after the upward revisions to the inflation and growth forecasts, helping to lift the euro. EUR/USD traded higher, not seeing much additional uplift from the hotter US initial jobs claims. EUR/CAD continued to rise further, on the back of yesterday’s Bank of Canada rate cut. German bund yields firmed slightly but the move remains contained.

Multi Asset Reaction (5-minute chart)