ECB reaction: A high bar not cut in June

• ECB Governing Council (GC) kept all its policy rates unchanged - depo rate remains at 4% as widely expected.

• Virtually no news from the March meeting. Key data, yet to be released, which will be incorporated in the June forecast update. At the margin, both monetary policy statement and press conference came on the dovish side.

• Data-dependent prominence consistent with no commitment beyond June.

• After yesterday’s US Consumer Price Index announcement, market pricing has now fully converged to our longstanding 'three rate cut' view starting next June.• Market reaction was very muted.

A decision free meeting as widely expected

ECB GC decided to leave all its policy rates unchanged, thus keeping its depo rate at 4% for a fifth consecutive meeting. Decision was widely expected across market participants and taken by a large majority as reported by Christine Lagarde during the press conference. Both monetary policy statement and press conference reiterated key messages from the March meeting.

The news was perhaps a dovish tilt

Building on a slightly more dovish monetary policy statement (“moderating wage growth, firms are absorbing part of the rise in labour costs in their profits”), President Lagarde dismissed the recent rebound in energy prices arguing that the ECB March inflation trajectory already incorporated a number of bumps before reaching the target in mid-2025. Furthermore, services inflation remains high – at 4% for a fifth consecutive month - but she emphasised that “we are not going to wait before everything goes back to 2%”. Finally, she highlighted that a few GC members already felt confident enough to cut interest rates in April - “the direction is rather clear”.

More data needed to ascertain domestic disinflation

President Lagarde reiterated the message from the March meeting that a lot of data will be released before the June meeting. Above and beyond the usual dissection of monthly (services) inflation print, quarterly series such as negotiated wages, labour productivity, and unit profits will be available for Q1. They will be key to check - and incorporated into Eurosystem staff forecast update - whether ECB’s two key assumptions made in March will still be on track: expected pick-up in labour productivity, de facto reducing unit labour costs, and evidence of lower corporate profits absorbing increased labour costs. Despite ECB’s all prominent data dependence, we think significant upside surprise would be required for the ECB not to cut in June in line with our longstanding call.

Uncommitted rate cut path

Both monetary policy statement and press conference were consistent in avoiding making any comments on the future rates path in line with our expectations. After a first 25 basis points (bps) rate cut in June, we continue to expect two more cuts in September and December landing the depo rate at 3.25% by year-end.

The ECB April monetary policy has been uneventful for financial markets

Both short- and long-term parts of the curve were broadly stable at 2.96% for the 2 year (-2bps) and 2.46% for the 10 years (flat), while EURUSD was also flat at 1.07. We are a bit surprised that June rate cut has not been fully priced (still at 80%) but we believe some investors still are not admitting the ECB can cut before the FED. ​ By year end, the market still expects 75bps of rate cut in line with our long-standing call.