ECB March meeting: monetary policy “meaningfully” less restrictive

As widely anticipated, the ECB has reduced its three key interest rates by 25 basis points. While the decision was not unanimous, it reflected a consensus, with Bank of Austria Governor R. Holzmann abstaining from the vote. Terminal rate at 2% by June, though risks of a pause are increasing We continue to forecast two additional 25 basis point rate cuts in the upcoming meetings, aiming for a deposit rate of 2% by June. However, we acknowledge the possibility of a pause depending on incoming data, which could delay reaching the 2% target only by end summer. W e continue to anticipate a rate cut in April, as we expect further progress on the inflation front. Additionally, the recent appreciation of the euro and declining oil prices w ould also provide some relief to inflation. The June decision will be contingent on upcoming data, new forecasts, and geopolitical developments and could thus be more at risk . Monetary policy seen as “meaningfully” less restrictive In its March statement, the ECB revised its reference regarding monetary policy restrictiveness, now stating that it is becoming "meaningfully" less restrictive, a shift from the previously "restrictive" stance noted in January . We interpret this shift as a hawkish signal, suggesting that the direction of travel is now less clear, and that the ECB is approaching its terminal rate . T he data-dependency in all upcoming decisions was stressed again and again with no pre-commit ment to a particular rate path. Inflation seen close to target ; GDP growth revised downward The March staff projections do not account for recent infrastructure and defense spending announcements from the German government but include some US tariffs announcements on Europe (cut-off date: 19 February) . G rowth outlook is revised downward by -0.2 pp in 2025 and 2026, al though some pick-up is still anticipated (see Table 1 ). Risks remain tilted to the downside. The inflation forecast is, relative to December, broadly unchanged. Headline inflation is expected to be slightly above target in 2025 (2.3%, +0.2 pp vs. December forecasts due to energy prices) and around 2% in 2026 and 2027 , with inflation set to reach 2% by early 2026 . Core inflation forecast is also broadly unchanged and close to 2% . President Lagarde noted that an increase in defense and infrastructure spending could stimulate economic activity but may also contribute to inflation through its impact on aggregate demand. We interpret this as a cautious approach, reaffirming the ECB's mandate focused on inflation .