ECB Update: Get On With It

1. The European Central Bank (ECB) cut again by 25bps today, bringing its cutting cycle that began last week to a total of 125bps.

2. In our view, the ECB remains behind the curve--a view strengthened by this morning's miserable EU GDP data. 

3. To put it bluntly, the ECB should have cut by 50bps today, but the Governing Council remains behind the curve--the discussions they are having (about services inflation etc.) are just not that relevant for today's Eurozone economy. 

4. Given there was no discussion of 50bps at all today, we expect 2x25bps to come over the next two meetings as the Eurozone recovery continues to lag. 

5. Our confidence stems from two key dovish points in today's press conference. First, Lagarde spent a long time on lending statistics, which means the GC has started thinking about growth.

6. Second, Lagarde clearly stated that the ECB might have to go below the neutral rate during this cycle--a clear signal that the whole r* debate is more academic than practical. 

Details below:

• Today's press conference was preceded by disappointing EU Q4 GDP data--the Eurozone as a whole stagnated (its worst performance since 3Q23, led by a decline in German and French GDP, and only partly offset by continuing Spanish growth. 
• Given the political inability to pass a budget in most European countries, this means that the ECB is the only policymaker currently able to foster growth.
• By unanimous decision, the Governing Council (GC) cut rates by 25bps. 
• This is helpful, of course, but not enough to kickstart growth for the two largest economies which remain in a rut.
• In other words, the ECB remains behind the curve but is headed in the right direction.
• The move and the accompanying press conference contained enough dovish signs to build our confidence that the next two moves (on March 6 and April 17) will deliver at least another 50bps. 
• First, Lagarde spent a considerable amount of time discussing mortgage rates, corporate lending rates, and the Bank Lending Survey, which came out on Tuesday (see chart below).
• This is a good sign: it means the GC is paying attention to how their actions are affecting lending and thus the real economy, rather than fixating on backward-looking inflation metrics. 
• Second, when asked about the neutral rate, Lagarde had a robust response, both referring questions to a staff paper coming out next month (irrelevant) and saying that the ECB might need to go below neutral (very relevant!)
• This should open up futures pricing which is currently stubbornly stuck at 1.93% at the end of the year--a mere 80bps from where we are today. 
• We view some opportunity to the dovish side of that, given persistent Eurozone underperformance, absurdly high savings rates, and lazy releveraging by corporates. 
• On the hawkish side, of course, Lagarde (and the journalists) still spend too much time discussing domestic and services inflation, while her comment that the Eurozone's 2024 performance was "certainly a recovery" struck us as bizarre. 
• Lagarde wisely said very little about upcoming U.S. trade policy decisions. 
• She also enjoys a much friendlier relationship with the EU's executive than Powell does with Trump--Commission President Ursula von der Leyen joined the GC for dinner on Tuesday. 
• In summary, we view today's move as a step in the right direction and see risks tilted to the dovish side. 
• The European economy remains underlevered and the lower the rates outlook can go the faster an actual recovery can take hold. 

All best, 

Dimitris and the Aurora team.

To book a meeting with me to discuss these or any other Aurora themes contact darlene@auroramacro.com

Upcoming travel:

Boston, MA - February 12

Washington, DC - March 2-4

Frankfurt, Germany - March 12 (ECB Watchers)

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