ECB preview: a cut despite sticky services inflation

We expect the ECB to cut rates by 25bp at its meeting next week and to signal that the terminal rate has not been reached yet. While it is true that services inflation remains uncomfortably high, a majority of G overning Council members will interpret this a s a lagging indicator of future inflation dynamics. We continue to expect the ECB to cut its deposit rate by 25bp in the upcoming meetings until it reaches 2% in June. Recent comments from several GC members seem to be consistent with a terminal rate of 2%, although some comments indicated a more gradual pace for rate cuts. All this is conditional on our view that the euro area will grow moderately this and next year and that inflation will stabilize – after some undershooting in 2025 – around 2% by the end of 2025 and throughout 2026. But the macro environment could, of course, turn out to be much bleaker, not least if trade tensions across the Atlantic were to escalate , which is not our baseline scenario . We view a potential trade war with the US as pre-dominantly disinflationary and would expect in such a scenario additional rate cuts by the ECB.