As per a Bloomberg report citing individuals familiar with internal discussions, the European Central Bank (ECB) might consider dropping the “restrictive” label from its monetary policy stance in its upcoming decision in March.
A further reduction in borrowing costs by a quarter percentage point, reducing the deposit rate to 2.5%, is highly probable for that meeting, said the sources.
As the ECB prepares to potentially adjust its policy language, officials are evaluating how to communicate these changes effectively. Although the ECB spokesperson refrained from commenting on the possible adjustments, it is clear that policymakers are contemplating the timing of halting rate cuts or potentially pausing along the way.
The ECB maintains an official stance of making decisions on a meeting-by-meeting basis without pre-commitment.
Following the news, the euro recovered from an earlier decline and remained stable at around $1.042, while German bond futures saw reduced gains post-European trading session.
Prior to the report, investors anticipated three more quarter-point rate cuts in 2025, which would bring the deposit rate to 2%. In past discussions, ECB officials have suggested that an optimal interest rate range that neither excessively stimulates nor restrains the economy lies between 1.75% and 2.5%.
Meanwhile, President Christine Lagarde narrowed this range slightly last week to between 1.75% and 2.25%.
A more precise understanding of this so-called neutral rate would enable the ECB to fine-tune its policy, addressing the dual goals of curbing inflation towards 2% while avoiding further constraints on already weak demand.
On Friday, French consumer prices remained unchanged at 1.8%, while earlier reports from Spain indicated a surprising rise. Despite these updates, some officials are cautious about overly emphasizing the neutral rate due to its elusive nature.
Lagarde announced that the ECB will publish a staff research report on February 7 to guide the Governing Council’s future decisions. When asked about potentially reducing rates below the neutral level to stimulate the economy, Lagarde remarked that it is still unclear.
At the recent ECB meeting, which saw a fifth consecutive quarter-point rate cut in line with economists’ expectations, Lagarde reiterated that the policy remains restrictive, though the neutral rate was not discussed during the session.
