MUFG on the upcoming ECB rate decision - FJElite.

The ECB’s upcoming policy meeting next week on 6th March is attracting more attention after recent comments from ECB officials. The ECB has already clearly bsignalled that it plans to deliver another 25bps cut next week lowering the policy rate to 2.50%. However, it is becoming less clear whether the ECB will continue to maintain the current pace of easing after next week by cutting rates at every meeting. The risk of the ECB skipping a meeting and leaving rates on hold at the following meeting in April has been increasing recently. However, the euro-zone rate market is still pricing in a high probability (~68%) another 25bps of cut in the April as well. The looming threat of tariff hikes on the EU in the coming months continues to pose downside risks to growth in the euro-zone and may encourage the ECB to keep lowering rate at every meeting at least until rates move closer to President Lagarde’s estimated range for the neutral rate between 1.75% and 2.25%. Recent comments from ECB officials have indicated though that views on further policy action are beginning to become more dispersed. Governing Council member Nagel stated that rates are “getting into more into the neutral term” suggesting that the need for further cuts is diminishing. He added that “it’s wise to take one step at a time in terms of monetary policy given the higher level of uncertainty, and emphasized that they are not in a rush to cut rates further. A view that was shared by ECB Executive Board member Schnabel who stated that “we can no longer say with confidence that our policy is restrictive”. She believes that “we are getting closer to the point where we may have to pause or halt our rate cuts”. Governing Council member Wunsch stated that “I’m not pleading for a pause in April but we must not sleepwalk to 2.00% without thinking about it”. Governing Council member Holzmann expressed the view that “a decision in favour of another cut gets harder and harder, both now and beyond March”. The comments suggest to us that it is far from a done deal that the ECB will cut rates both in March and April as currently priced in. It poses one potential upside risk for euro in the near-term although we still expect the policy rate to fall to 2.00% this year.