ECB Abandons Rate Cut Plans Amid Resilient Growth
The European Central Bank (ECB) has revised its call on interest rates, predicting that it will not cut rates in 2027. Instead of a rate cut to 2.00%, the ECB now expects to maintain the deposit rate at 2.50% throughout 2027.
This change is due to a more resilient growth backdrop than previously assumed. The conflict in Iran has led to higher corporate costs and consumer prices, but growth remains close to potential. Manufacturing is recovering stronger than expected, driven by new orders, particularly from the rapid global investment in artificial intelligence.
Despite this, contained underlying inflation limits the need for more than one additional hike. Headline inflation has been confined to energy products, with no signs of spillovers to other goods and services or food. Wage growth is easing, and wage expectations remain unchanged, indicating that there are no second-round effects.
The deposit rate at 2.50% will be at the upper end of the ECB's estimated neutral range. Further hikes would take policy into restrictive territory, deliberately weakening demand. The risks to this call are balanced, with potential for stronger-than-expected spillovers to underlying inflation or slower wage growth.