ECB cuts deposit rate to 2.25 per cent from 2.5 per cent

A new rate cut, as widely expected. A new, worried diagnosis of the economy. The European Central Bank cut the official cost of credit by 25 basis points for the seventh time since June, bringing the rate on deposits, the reference rate, to 2.25 per cent from 2.50 per cent, the rate on main refinancing operations to 2.40 per cent from 2.65 per cent and the rate on marginal loans to 2.65 per cent from 2.90 per cent. The decision was unanimous, and while several options were discussed 'hypothetically', explained President Christine Lagarde at a press conference, no one proposed a more incisive cut.

Above all, the diagnosis of the economy has been changed. By now, the only reference to price pressures in the official communiqué is the 'high wage growth', which is, however, partially absorbed by the moderation in profits: price dynamics, as in March, is now heading back to the 2% target on a sustainable basis. "Services inflation has also eased markedly in recent months", is the important addition to the announcements of previous meetings: it was the missing, and expected, building block in the disinflation process. Thus there seems to be no longer any need, in the ECB's words, for a restrictive monetary policy: a rate at 2.25 per cent is after all in an area compatible with the neutral nominal rate (which is difficult to identify). However, Lagarde reminded that the concept of a neutral rate is relevant 'in an economy without shocks', which is not the case at present.

The dominant theme is therefore, unsurprisingly, tariffs and the uncertainty surrounding them. "The euro area economy has become resilient to global shocks, but the outlook for expansion has deteriorated due to rising trade tensions," explains the European Central Bank. "Increased uncertainty is likely to reduce household and business confidence and the adverse and volatile market response to trade tensions is likely to lead to tighter financing conditions. These factors may further weigh on the economic outlook for the euro area'. The reference to tightening financing conditions suggests that the ECB fears that the rise in yields and the euro may counteract the effect of the rate cuts implemented so far, and constitute a higher than necessary cost factor for households and businesses.

Some signs of the new situation have already manifested themselves, Lagarde explained. Uncertainty, she explained, has affected exporters, who now face new barriers, while consumers are becoming more cautious and may reduce their spending. Although the economy appears resilient: economic activity is expected to have grown in the first quarter and unemployment seems to have stabilised at 6.1 per cent, the lowest since the introduction of the euro. Wage growth is also slowing down and productivity is increasing: 'Unit labour costs are rising less rapidly'. Most measures of inflation expectations continue to point to 2% (and are therefore pegged).

Lagarde explained in particular that the impact of tariffs on inflation will only become clear over time, and there are 'divergent ideas about the short-term and long-term impact'. Uncertainty is therefore very high. In order to support growth and increase the resilience of the eurozone, Lagarde highlighted a paragraph in the introductory statement to the press conference that is of particular importance today. "It is even more urgent," is the ECB's message to the other European institutions, "that fiscal and structural policies make the euro area economy more productive, competitive and resilient. The European Commission's Competitiveness Compass offers a concrete roadmap and its proposals, including those on simplification, should be adopted swiftly", including the Capital Market Union to be implemented "according to a clear and ambitious timetable". It is also important, the ECB adds, to 'quickly establish the legislative framework to prepare the ground for the potential introduction of a digital euro'. Public finances must be even more sustainable, giving 'priority to essential growth-enhancing structural reforms and strategic investments'.