ECB June meeting: a cut, but no rush for further ones

As widely anticipated, the ECB has reduced its three key interest rates by 25 basis points, bringing the deposit rate cut to 2%. The decision was ‘almost unanimous’ , with o ne governing council member dissenting (we suspect it was R. Holzmann ) . During the Q&A session, C. Lagarde refuted rumors of early departure and confirmed she intends to complete her term. The ECB is “well positioned” to navigate through uncertainties President Lagarde emphasized that the ECB is “w ell positioned” to address uncertainties , hinting t hat there is no rush for additional rate cuts . The data-dependency approach - the most important data being ‘tariffs ’ - in all upcoming decisions was stressed again with out any pre-commitment to a particular rate path . We did not perceive any dovish bias during the Q&A session. Inflation will undershoot in 2026, before returning to target in 2027 The June projections are surrounded by huge uncertainties regarding tariffs and the ECB released two alternative scenarios as they did during the pandemic. In the baseline scenario, the growth outlook is broadly unchanged over the forecasting horizon . The main surprise stems from the downward revision of the headline inflation for 2025 and 2026 (-0.3 pp each year), which indicates a marked undershooting of the target in 2026 . However, core inflation remains largely unchanged beyond 2025, suggesting limited room for cuts substantially below the neutral rate. Moving from July towards September Looking beyond June, we now anticipate another rate cut only in September with a deposit rate at 1.75%, the lower bound of our estimates of the neutral rate [1.75%-2.25%] . While we previously expressed confidence in a potential rate cut in either July or September, we now believe that a July cut is unlikely—unless there is a significant negative development regarding US tariffs. This assessment is motivated by: i ) the stance of C. Lagarde during the press conference, which indicated no rush for further rate cuts, and ii) the limited data to be released by the July meeting (final Q1 GDP, July PMI, and June CPI), with the most crucial data being the US tariffs decision on July 9th that marks the end of the “pause” on reciprocal tariffs. We set our terminal rate at 1.75% assuming no substantial adverse developments regarding tariffs. While a final rate cut to 1.5% by year-end cannot be completely ruled out, the threshold for this outcome has been raised following this meeting.