ECB Policy Outlook Remains Uncertain Ahead Of ECB Minutes
Article published on February 25th, 2025 8:00AM UK Time
The European Central Bank (ECB) delivered a widely expected 25bps rate cut, cutting the Deposit Rate to 2.75% at their last meeting. Policymakers emphasized a data-dependent, meeting-by-meeting approach while avoiding firm commitments to further easing. Although the ECB still describes policy as “restrictive,” recent comments from ECB Executive Board Member Isabel Schnabel suggest that this assumption is increasingly uncertain.
Is ECB Policy Still Restrictive? Schnabel Raises Doubts
Schnabel, a known policy hawk, signaled that the ECB may be approaching a point where further rate cuts require reconsideration:
- “We can no longer say with confidence that our monetary policy is still restrictive.”
- While she did not claim policy had turned accommodative, she noted that a 25bps cut should not be overstated.
- When asked if the ECB should drop its reference to restrictiveness in March, she acknowledged that “this is a discussion we should have.”
She also flagged persistent services inflation and wage growth at high levels, though she expects some moderation in February. This raises questions about the ECB’s future policy path, as inflation appears under control, yet cost pressures continue creeping up for businesses.
Eurozone Economy: Stabilization, Not Growth
After a weak end to 2024, early 2025 data suggests stagnation rather than recovery. The composite PMI for February held steady at 50.2, indicating that while conditions are not worsening, growth remains elusive.
- France continues to struggle, while Germany and the rest of the eurozone show modest expansion.
- Manufacturing appears to be bottoming out, with the manufacturing output PMI rising from 47.1 to 48.7—still in contraction but at a slower pace.
- Services remain in expansion, but new business is weakening, and consumer confidence, while slightly improving, remains well below historical averages.
With demand still soft, businesses are reducing workforces, and household consumption remains weak, further clouding the near-term economic outlook.
Overall, while the ECB remains cautious, doubts are growing over how restrictive policy truly is. With economic momentum still lacking, markets remain convinced that further rate cuts are coming—though the ECB’s messaging suggests the path ahead is far from clear. Will Thursday’s minutes shed any light. Investors will be scouring them looking for clues. The current neutral rate is seen as 1.75% -2.25% by the ECB, so that is still some way below the 2.75% current ECB level. Will the minutes validate this view on the neutral rate?