So, as expected, the ECB cut their policy rate by 25 basis points to 2% at their June meeting. That said, both the policy statement and the press conference were quite hawkish. The ECB are now quite confident that inflation will be at or close to their 2% inflation target over the forecast horizon. So that strongly signals that the ECB doesn't really see a need, need to continue cutting interest rates from here.
Moreover, having cut interest rates down to 2%, rates are now firmly in what the ECB would see as neutral territory. And that's a really strong position for them to be in, in light of all the continuing uncertainty that we're seeing, in particular around tariffs.
So, for example, if the EU were to impose retaliatory tariffs and risk that inflation could go up in the euro area, then the ECB could easily raise interest rates from here. Similarly, if both the economy and inflation were to continue to cool from this point forward, then the ECB could keep cutting interest rates lower.
So for now, at 2% policy rates with an expectation that they are at target over their forecast horizon puts the ECB in a very good position in order to be able to respond quickly as events continue to unfold over the coming in weeks and months.
For now though, the bottom line for us is that our call for some time now that the ECB would cut interest rates down to 2% by June and essentially keep interest rates there for the remainder of this year very much remains on track.
