Job Done But Negative Surprise Could Still Force The ECB Out Of Its Good Place

Today's decision to keep interest rates on hold reflects a greater conviction at the ECB that the current level of rates is a comfortable one. While there are still good reasons to justify a preemptive rate cut as discussed here , the ECB unanimously decided to keep rates on hold today. And all of Lagarde's remarks throughout the press conference were crafted to convey a strong sense of conviction behind the ECB's position. Lagarde said that the disinflationary process was over, risks to the economy were more balanced than before, and the inflation outlook was well-behaved. She also dodged any questions on France.

At the same time, however, looking at the details of the ECB's latest staff projections shows that there are still downside risks to inflation and hence the door for another rate cut remains open, even though Lagarde might not agree right now. The forecast for core inflation was revised downwards and could even touch 1.7% in 2027. Also, the technical assumption of unchanged interest rates until 2027 clearly suggests that the risks to the ECB's 'good place' are asymmetric: undershooting inflation now appears more likely than overshooting. As a consequence, although the threshold for another rate cut has been set high, we cannot entirely rule out the possibility that the ECB may be forced to abandon its 'good place' in the coming months.

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