The ECB is set to deliver its latest interest rate decision this Thursday, 5th June. Sharing his thoughts on what they might decide, Shaan Raithatha, Senior Economist at Vanguard Europe has said:
“The European Central Bank is expected to cut its key interest rates by 0.25% at its June monetary policy meeting, which would leave the deposit facility rate at 2%. This is at the bottom-end of our neutral range.
“All eyes will be on the update to the staff’s economic forecasts. We expect little change to the GDP growth projections, with the current 0.9% estimate for 2025 close to our call of 1.1%. A stronger-than-expected Q1 print, likely driven by front-loading of exports, should be offset by a downgrade to growth for the rest of the year as elevated uncertainty weighs on activity. In 2026, risks to both the ECB and our forecasts of 1% growth are skewed to the downside given the prospect of a slower and/or smaller implementation of Germany’s fiscal package.
“Despite little movement on the growth side, we expect downgrades to the inflation projections. Wage growth has continued to fall sharply and is now tracking below 3% on an annualised basis, whilst euro strength will weigh on goods imports. Indeed, Brent crude oil prices are now 20% lower than one year ago in euro terms. Expect both headline and core CPI inflation to be downgraded below 2% by the end of the 2026.
“To add further fuel to the doves, May’s flash CPI print came in lower than consensus expectations and reversed April’s Easter-driven anomaly (most of the gains here were driven by a rise in air fares and package holidays). Headline CPI is now below 2% year-on-year and both core CPI (2.3%) and services CPI (3.2%) are at their lowest rates for three years. With growth set to remain slightly below trend and an expectation that wage growth will continue to fall, we now see downside risks to our terminal rate call of 1.75%. In any case, the odds of a July cut have materially increased following the May CPI print.”
