Synopsis:

The ECB lowered its deposit rate by 25bps to 3% at its December meeting, dropping its “restrictive” policy stance and signaling further rate cuts amid rising stagflation risks.

Key Points:

• Rate Decision: The ECB cut the deposit rate to 3%, balancing concerns over slowing growth and inflation persistence.
• Policy Shift: The ECB dropped its reference to “restrictive” monetary policy, leaving the door open for additional rate cuts.
• Growth vs. Inflation Risks: Stagflation risks increased due to weaker growth forecasts and persistent inflation pressures, compounded by political uncertainty in France and potential adverse US policy impacts.
• Forecasts Update:
  • Inflation Projections: 2.4% in 2024, 2.1% in 2025, stabilizing near 2% by 2026-2027.
  • Core Inflation Projections: 2.9% in 2024, easing to 1.9% by 2026-2027.
  • Growth Projections: 0.7% in 2024, rising to 1.1% in 2025 and stabilizing around 1.3%-1.4% in 2026-2027.

Conclusion:

ING views the ECB's cautious policy approach as a compromise between inflation control and growth concerns. The removal of the “restrictive” stance signals a readiness for further easing, though the ECB risks overestimating future economic resilience, potentially delaying necessary adjustments in 2025.