On autopilot until closing on neutral rate 

•The European Central Bank Governing Council (GC) decided unanimously to cut its depo rate by 25bps to 2.75% as widely expected. 

• No change was made to communication, as expected. Cautious, data dependent approach to remain. ​ ​ 

• President Lagarde remained elusive on the neutral rate. More news to come on 7 February with updated estimates to be published by ECB staff.

• President Lagarde maintained with difficulty the official line on the growth narrative. We think we are up for (significant) downward revision in March.• We maintain our baseline of consecutive rate cuts to 2% by June, and our end-year target at 1.5%.

Another 25bps rate cut delivered as expected. As widely expected, a fourth consecutive rate cut was decided – and fifth in total in this cycle - at today’s meeting, bringing the depo rate to 2.75%. During the press conference, President Lagarde mentioned that this decision was unanimous. She reported that unlike at the December meeting, a 50bps rate cut had not been discussed. ​ ​ 

No change in communication. The press conference brought virtually no new information to almost identical wording between the December and January monetary policy statement. The ECB is to keep a data-dependent and meeting-by-meeting approach. President Lagarde mentioned that by the March meeting, the GC will receive two more inflation prints and updated new forecasts. As the policy stance is still restrictive, it bodes well for another 25bps rate cut in March, as widely expected. Besides, she remained elusive on the neutral rate, highlighting that the debate is premature and “when we get closer, they will operate among others on the basis of staff research paper”, with updated estimates to be published on 7 February. It will be key to see whether the updated range will be closer to what she mentioned in December (1.75-2.5%; midpoint is 2.125%), or that she mentioned in Davos (1.75-2.25%; mid point is 2%). 

President Lagarde was surprisingly dismissive to growth worries. Today’s meeting came after the disappointing news that euro area GDP had stagnated in Q4 2024, thus coming significantly below ECB’s December staff 0.2% q/q forecast. Thus, ECB’s optimistic growth narrative (1.1% projected for 2025, Exhibit 1) is likely to be (significantly) revised down in March, materializing some of the long (unchanged since December) list of downside risks to growth. We think that private consumption and net exports are likely to be particularly affected by the revision. Finally, we were surprised that she also dismissed the impact on financing conditions of the recent long end rate sell-off. 

We maintain our baseline of continuous cuts until June to 2%, reaching 1.5% by year-end. Our baseline foresees only moderate growth improvement driven by private consumption this year. Continuous acceleration next year requires a recovery in investment that we see mainly driven by our expected rate cuts. More challenging times lie in the Spring, as soon as March, as we head closer to the high end of the neutral rate range. Incoming data will be paramount to tilt the decision to whether landing within neutral (2%) will be enough, or whether outright accommodation will be required, as is our baseline.

Hugo Le DamanyFrançois Cabau