AXA IM: ECB to cut again this week - easing will continue despite the hawks

Gilles Moëc, AXA Group Chief Economist and Head of AXA IM Research, discusses the upcoming ECB decision.

"In practice for this Thursday, just like everyone else we expect a fifth consecutive 25-bps cut to 2.5% for the deposit rate. The difficulty will lie in how the Governing Council handles its soft forward guidance, since the central bank is moving closer to the upper end of the range for the “neutral rate”. Isabel Schnabel made the point that, given the measurement uncertainty, she “cannot be sure” monetary policy is still in restrictive territory and wants a discussion on where to stop. Yet, Bundesbank President Nagel was more open: he played up the recent good news on the consumer prices front and affirmed his expectation inflation will return this year to the central bank’s target. The hawks may not be unified. While we think Christine Lagarde will likely want to keep her cards close to her chest and insist on how the central bank will react to the data, rather than following any pre-ordained path, we think she will maintain a general tone consistent with further cuts ahead.

We think that the point on whether monetary policy would still be “restrictive” after this week’s cut is becoming less crucial, since the right question for the ECB should be whether a mere neutral level is already inappropriate at this point, so that proper accommodation should now be the right stance. We expect the central bank to revise again its GDP forecast down, with this year to take the largest hit in the ECB’s scenario (0.2pp) to only 0.9%, which would put it clearly below the consensus estimate for the Euro area’s potential growth. In principle, and taking on board the lags of monetary policy, this should be consistent with a mildly accommodative stance.

The inflation side of the forecasts may however be less straightforward: energy prices (particularly for gas future contracts) rallied significantly right before the cut-off date for the forecasts. Overall, we expect a small upgrade on headline inflation for 2025/2026/2027 to 2.2% (+0.1pt) / 2% (+0.1pt) / 2.1% (unchanged) but crucially core should remain unchanged at 2.3% / 1.9% / 1.9%. But again, to return to our discussion of tariffs at the beginning of this section, what will be key is the characterisation of risks around the baseline, and with evidence accumulating of a steep deceleration in wages combined with harder-blowing headwinds on growth”, we think the ECB will increasingly focus on the downside risks. We continue to think the ECB’s policy rate will fall down to 1.5% by year end."