EconoFACTS

March 06, 2025 | 09:50

How Does the ECB Describe Policy? "Meaningfully Less Restrictive"

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Wasn't really expecting so much around this ECB announcement. The thinking had been.... yes, it will cut rates 25 bps but what will be said about the upcoming tariffs? This was before the big announcement that Germany would essentially ditch the debt brake... very impressive that this was done in one fell swoop. The planned €500 bln defence spending is a combined effort between the CDU and the SPD, who are in talks to form the next coalition government. Yes, the plan still needs to pass through parliament (the AfD opposes it) but there should be enough support. Besides, the AfD cannot lose public support either, but will likely put a lot of limits on how far to take this plan. The speed that this decision was made was impressive: Europe is becoming much more unified as it faces tougher economic headwinds (tariffs) and on the political front (Ukraine vs Russia and U.S.). As Friedrich Merz said, "whatever it takes". (Mario Draghi must be smiling.) Note that there is another emergency EU summit in Brussels on Ukraine taking place at the same time as the ECB gathering.

The ECB did indeed cut the deposit rate 25 bps to 2.50%. It still sees the disinflation process being "well on track". And, interestingly, "monetary policy is becoming meaningfully less restrictive". This line itself points to fewer rate cuts. Germany's big spend will help the ECB do its job. Meantime, inflation projections were revised higher (energy); and, growth forecasts were revised lower (on the back of lower exports and business investment). Indeed, in its words, "the economy faces continued challenges". No reference to the tariffs in the press release but President Lagarde said that growth risks were to the downside.

First question during the Q&A was about the meaning of the "meaningfully less restrictive" phrase. President Lagarde explained that the ECB is now moving to a more evolutionary approach, taking account of the 150 bps of rate cuts. (Also made reference to her analogy made during the recent G20 meeting about the Cape of Good Hope, and the warm waters of the Indian Ocean meeting the cold waters of the Atlantic... frankly, I was a bit lost to how that applies here but it could be because I'm operating in a dark hotel room far from home base on a small iPad and a couple of iPhones.)

Second question was again on the same phrase. The response was short ... the ECB is taking into account all of the work already done versus the process. Ok, got it. And will they pause in April? Disinflation is on track and there is huge uncertainty.... was it "high and rising" was a debate during the ECB meeting but there were risks and uncertainty "all over". She firmly stated that the Governing Council is not precommitting to a path and yes, some governors will have their views but the collective view is that they will not precommit to a path and they will be "more than ever" data dependent. If the data indicate that they are on the path, then they will cut. If the data do not, then they will pause. President Lagarde is "terribly sorry" that some will "find this frustrating" but things can change dramatically. But they will be "agile".

I get it.

There was "substantive discussion" around the table and the decision was consensus. "No one opposed the decision". Austria's Holzmann abstained. But there was no opposition.

In terms of direction of travel ... the ECB is not precommitting. It will be data-dependent "more than ever", and decisions will be made on a meeting-by-meeting basis. It is estimated that it will be very early in 2026 that the inflation target will be met due to expected energy prices.

On defence spending... the announcements were made recently and the ECB's staff have not calculated how much it will add to growth and inflation. If all of the spending works ("big if... needs to be passed and be implemented"), it will boost growth. "But more to come!"

Bottom Line: The ECB seems to be at a crossroads. It has done all it can do but given the huge amount of uncertainty ahead (President Lagarde used the word uncertain multiple times), we will need to keep monitoring events and data. For now, we are sticking with our expectation for a couple of more cuts.... next one in June. For now.