Daily Market Brief: ECB Rate Cut Expected, but Policy Language Holds the Key
Article published on March 6th, 2025 1:30AM UK Time
The European Central Bank (ECB) is set to cut rates by 25bps on Thursday, March 6, lowering the Deposit Rate to 2.5%—an outcome that markets have already fully priced in with a 96% probability. However, the real market driver will be whether President Christine Lagarde continues to characterize monetary policy as “restrictive.”
Economic Backdrop: Stagnation and Sticky Inflation
Since the ECB’s last meeting, headline inflation ticked lower slightly to 2.4% for February, down from 2.5% prior, while core inflation moved lower to 2.6% from 2.7% in January and services inflation dipped to 3.7% from 3.9%. This will help the Governing Council remain confident that inflation will return to target over the course of the year.
On the growth front, revised Q4 GDP data showed a modest 0.1% expansion, following a 0.4% increase in Q3. The latest HCOB PMI data suggests continued economic fragility:
- Manufacturing PMI improved to 47.3 from 46.6, signaling a slower contraction.
- Services PMI slipped to 50.7 from 51.3, below markets minimum expectation
- The Composite PMI held at 50.2, keeping the eurozone just above stagnation.
The outlook remains fragile, particularly as US tariff threats under a potential Trump administration loom over European exports.
Policy Statement: Will “Restrictive” Language Remain?
Markets are currently pricing in another 25bps cut now for April, but the language Lagarde uses will be key since 2.50% is the top of the ECB’s neutral range.
Morgan Stanley suggests that while the ECB may not drop the term entirely, it could qualify it, hinting that rates are approaching levels that are no longer restrictive. This would signal a potential pause in the easing cycle after the next cut or two.
Markets and FX Reaction: ECB Not the Primary Driver
At present, EUR/USD movements are being driven more by US economic data and geopolitical risks than ECB expectations. However, the meeting could still generate a bullish reaction if Lagarde removes the restrictive language and makes a case for a rate pause.