The 25 bp cut was widely expected. But the ECB surprised markets by saying monetary policy is now “meaningfully less restrictive”, despite revising growth lower and seeing risks tilted to the downside, including the prevailing uncertainty about global trade. Any boost to Euro Area growth and inflation from recent announcements of substantially higher defence and infrastructure spending will come later, likely next year.
As current assessment is a weaker outlook, we continue to expect substantial further policy rate cuts, to 1.75 percent by the end of this year.
With the prospect of much higher debt issuance in Europe, we would also expect the ECB to revisit the pace at which they reduce their balance sheet, despite sticking to the mantra that adjustments of their balance sheets is not a key instrument of monetary policy.
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