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Essentials of Monetary Policy

European Central Bank: Being Agile

April 17, 2025
Mirza Shaheryar Baig
Foreign Exchange Strategist

According to the European Central Bank (ECB)

  • The ECB lowered its policy interest rate from 2.50% to 2.25%, in line with expectations.
  • The accompanying statement was more dovish than we expected. The phrase on policy restrictiveness was removed, which suggests the bank is reducing its earlier emphasis on the neutral rate.
  • In addition, the wording on inflation is less hawkish. The outlook on growth was downgraded.

Implications

The April ECB meeting was a little more dovish than we expected. In particular, the language around inflation and the impact of tariffs leans dovish. In the press conference President Lagarde acknowledged that a cut of 50bps was discussed. The market has added 10bps of cuts to the EURIBOR curve. The terminal rate is now priced around 1.5%.

 

We think the ECB is creating optionality to act beyond its earlier guidance of pausing in the neutral range of 1.75%-2.25%. If trade talks fail and downside risks to inflation exceed upside risks from tariffs, then the ECB would be willing to make policy more accomodative. Thus, the EURIBOR pricing reflects balance of risks, which the market currently views as skewed to the downside.

 

We expect two more rate cuts from the ECB this year vs. market pricing of three cuts.

2025 Schedule of Central Bank Meetings

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