The European Central Bank is about to cut interest rates: the dovish tone remains, but will the "restrictive" wording change?
Currently, the market generally expects the European Central Bank to cut interest rates by 25 basis points in March, with attention shifting to changes in the bank's wording regarding monetary policy. Nomura anticipates that the European Central Bank may change its wording from "restrictive" monetary policy to "assessing restrictive," shifting its stance to "cautiously dovish," while lowering economic growth forecasts and raising inflation forecasts
The European Central Bank may continue to cut interest rates in March, but its monetary policy stance may be more "subtle."
In the latest research report, Nomura Securities stated that a 25 basis point rate cut by the ECB in March is "a done deal," and the market's focus will shift to changes in the bank's "restrictive" language regarding monetary policy.
Is a March rate cut by the ECB a foregone conclusion?
The report pointed out that most ECB officials' comments lean towards further rate cuts. Officials such as Kazaks, Villeroy, and Stournaras have expressed support for additional cuts, even suggesting that rates could drop to 2% before summer. Simkus also believes there is "no reason not to cut rates in March."
The report argues that, in addition to the officials' "dovish" remarks, recent economic data also supports the ECB's rate cut:
First, wage growth is slowing. The agreed wage growth rate in the Eurozone for the fourth quarter of 2024 has fallen to 4.1%, below expectations, which gives Nomura more confidence that price pressures in the service sector will ease this year.
Second, service sector inflation is cooling. In January 2025, service sector inflation year-on-year decreased to 3.9%, below expectations, and Nomura predicts this figure will further drop to 3.8% by February.
Third, economic growth remains weak. The report states that although the GDP growth data for the fourth quarter of 2024 has been slightly revised upward, it still falls below Nomura's expected level.
Language may shift from "restrictive" to "assessing restrictiveness"
Nomura expects the ECB to modify its wording regarding the restrictiveness of monetary policy at this meeting, with the new language likely emphasizing: Due to recent rate cuts, the current restrictiveness of monetary policy is lower than before, while indicating that the central bank will assess the restrictiveness level of deposit rates.
The report adds that the ECB is not expected to completely abandon the term "restrictive," but will adopt a more subtle expression, and will still not provide any clear guidance on the interest rate path, continuing to emphasize data dependence.
The report states that the ECB's shift to "less dovish" language may support the euro's performance in the short term . Furthermore, considering that the market has currently priced in over 80 basis points of rate cuts before the end of 2025, any signs suggesting a pause in the rate cut cycle could provide strong support for the euro.
In addition, potential increased fiscal spending in Germany may also drive the euro's continued strength.
Downgrade economic growth forecast, slight upward revision of inflation forecast
In the March meeting, the ECB will update its macroeconomic forecasts.
Nomura expects the bank to lower its GDP growth forecast for 2025 from 1.1% to 0.9%, and the GDP growth forecast for 2026 from 1.4% to 1.3%; regarding inflation, it is expected that the inflation rate forecasts for 2025 and 2026 may be raised by 0.1 percentage points to 2.2% and 2.0%, respectively.
It is worth noting that Nomura believes that Trump's tariff policy will not be included in the ECB's March forecasts. Previously, according to Xinhua News Agency, Trump announced a 25% tariff on all U.S. imports of steel and aluminum and a 25% tariff on the EU
