• The ECB delivered as expected its eighth 25 bps rate cut to 2%. One member (most likely Holzmann) voted to skip. ECB chair Lagarde avoided a question whether this was now a neutral rate but said the current level means it is well positioned to navigate through the uncertain conditions. It clearly mimics recent Fed wording used by policy makers when they are supporting the long rates status quo. Lagarde in any case noted the ECB is getting towards the end. It penciled in a lower inflation forecasts for this year to 2% (from 2.3%) and 1.6% (from 1.9%) in 2026 owing to lower energy prices and a stronger euro. 2027 remained unchanged at 2%. Core CPI forecasts were broadly the same at 2.4%-1.9%-1.9%. GDP is seen at 0.9%-1.1%-1.3% over the policy horizon, barely deviating from March. A strong start in 2025 but a trade uncertainty-related weaker remainder of the year resulted in the unchanged forecast. Rising government spending in defense and infrastructure will increasingly support growth over the medium term, flanked by higher real incomes and a robust labour market underpinning household consumption. On these growth forecasts, Lagarde said she wouldn’t exclude further upward revisions. ECB staff produced alternative scenarios where an escalation of trade tensions ends up in below-baseline growth and inflation forecasts. A benign outcome leads to higher growth and to a lesser extent CPI. Such scenario analysis is testament to the high uncertainty context, which is also why the ECB refrains from giving any forward guidance. Growth risks are tilted to the downside, with Lagarde referring to the trade and geopolitical theme. Some note this is a less alarming analysis than in April, when Lagarde spoke about “increasing” downside risks. On inflation the (risks surrounding the) outlook is more uncertain than usual with a series of factors often delivering a conflicting impact. • European yields initially dipped when digesting especially the new inflation forecasts but quickly rebounded after a relatively upbeat growth assessment and the hint to a pause. The curve bear flattens with net daily changes varying between +1.2 and +5.4 bps. Money markets pared easing bets though still expect at least one more this year. The euro strengthens to EUR/USD 1.1485 and is nearing the April high. The marginal USD appreciation after reports of president Trump and his Chinese counterpart Xi having held a phone call quickly evaporated. It is nevertheless their first contact, initiated by Trump, and potentially an important step towards easing trade tensions. The news also helped US yields overcome their intraday weakness (jobless claims related) to trade virtually flat on the day.
News & Views
• The Bank of England published its monthly Decision Maker Panel (DMP) survey of CHO’s from SME’s. Firms reported that their realised own-price growth remained unchanged at an average annual rate of 3.5% in the three months to May. Year-ahead own-price inflation was expected to be 3.7% in the three months to May (from 3.9%). Expectations for year-ahead CPI inflation remained unchanged at 3.2% and at 2.8% for the 3-yr ahead gauge. Firms reported annual wage growth was 4.7%. Expected year-ahead wage growth fell from 3.8% to 3.7%. Across all questions on the potential impact of recent changes to US trade policy on sales, prices and investment over 70% of firms reported that these would have no material impact on their firms. 56% of firms nevertheless reported that the overall level of uncertainty facing their business was high or very high. • In a press conference today, Governor Glapinski of the National Bank of Poland (NBP) commented yesterday’s NBP policy decision. The NBP left its policy rate unchanged at 5.25% with few clues going forward. Growth in Q1 at 3.2% was supported both by consumption and investment. The NBP also mentioned an ongoing low unemployment rate and a high level of employment, with mixed signals on wage growth. CPI inflation in April declined to 4.1%, but this was mainly due to a lower fuel prices. NBP expects inflation ex food and energy prices to decline slightly in May, but services inflation is expected to remain elevated. At the press conference today, governor Glapinski said economic growth and in particular fiscal policy as being pro-inflationary. New gas tariffs might decelerate inflation in coming months, but at the same time, the NBP governor still sees risk of higher inflation longer term. The comments suggest that there is still division inside the MPC on the timing for further rate cut after May’s 50 bps one. The zloty gained modest ground during the press conference (EUR/PLN 4.28).
Graphs
European 2y swap yield rebounds to 2%. ECB cut rates but Lagarde offered optimistic view and a hint at a pause (or end?) in the cycle
EUR/USD prepares for a test of the April high
Nasdaq opens slightly higher after futures abruptly reversed course on reports of Trump-Xi call
Stronger euro and below-consensus Swedish inflation lifts EUR/SEK towards 11 area (weekly graph)
Table
Contacts
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