Moreover, it says the risks to its outlook are still skewed negatively, not least due to the new administration in the U.S. and President Donald Trump’s threats of trade tariffs.
Confidence sapped
The political environment, both external and domestic, has sapped confidence over the past year, diminishing the impact of four previous cuts that had brought official rates down by a full percentage point. The Bank noted that even though household incomes are more than keeping pace with inflation, people “have not yet drawn sufficient encouragement … to significantly increase their spending.”
“The ECB is clinging on to the optimism that falling rates and rising real wages will translate into a rebound in private consumption, but as we have seen … the confidence to spend them just isn’t there,” Kyle Chapman, a foreign exchange analyst with Ballinger Group, said in e-mailed comments. “The recovery has been repeatedly delayed, and it is hard to imagine that this turns around in the near term.”
Several members of the ECB’s Governing Council have already voiced such fears, stressing that the ECB should cut rates to a “neutral” level as quickly as possible. Deutsche Bank’s Mark Wall said in e-mailed comments that rates may “quite probably” end up below neutral by year-end.
For the moment, Lagarde said, policy is still “restrictive”, adding that no-one had suggested otherwise at Thursday’s meeting. ECB staff estimate the neutral rate could be anywhere between 1.7 and 2.5 percent.
“The lack of discussion around neutral rates implies that at least two or three more cuts are locked in in policymakers’ minds,” Chapman said.
