ECB June meeting: No pause for cutting rates

We expect the ECB to cut its deposit rate by 25 bp s at next week’s meeting, a decision widely anticipated by the market . This cut is warranted due to inflation nearing target levels and sluggish economic prospects, further complicated by uncertainties surrounding US tariffs. Looking beyond June, we anticipate two additional 25 bps rate cuts and a terminal rate at 1.5% . We are confident that the ECB will implement another rate cut in either July or September, as several Governors have expressed their readiness to adopt a mildly accommodative stance. A final cut to 1.5% —below our estimated neutral rate of around 2%—remains more uncertain and will depend on incoming data, especially regarding tariffs and inflation. The ECB will unveil its new set of forecasts jointly prepared by ECB staff and National Central Banks . Forecasting these key metrics ha ve been challenging due to varying assumptions, uncertainties regarding tariffs, and the Bundesbank's first-time inclusion of its estimate of the German fiscal package. We expect slight downward revisions in inflation forecasts for 2025 and 2026 due to falling oil prices and euro appreciation. Additionally, we forecast a decline in services inflation in the coming months, supported by our models. W e believe the ECB will maintain a data-dependent approach, making decisions on a meeting-by-meeting basis , with President C. Lagarde emphasizing the importance of maintaining full optionality and flexibility. Contrary to I. Schnabel ’s call for keeping a “steady hand” in an unsteady world, we think the ECB will advocate for more “agility” in an unstable world by keeping “free hands” .