For the first time this cycle, the ECB mentioned the possibility of a rate cut in a press statement, paving the way for a rate cut in June. Lagarde said some directors had already voted in favor of a rate cut at this meeting, but the guidance for the June rate cut was presented in the mildest possible way, and the guidance within the board should be voiced. suggested a difference. More importantly, the statement was reluctant to provide any guidance on the direction beyond June.
Remaining strong domestic price pressures appear to be the ECB's biggest inflation concern. Lagarde sought to emphasize the decoupling of inflation trends in the euro area and that in the United States, while elaborating that all important matters will be resolved in June's forward outlook. Our economists noted that US inflation has indeed been well ahead of the broader direction of euro area inflation trends for six months.
The market is still pricing in 20 basis points of easing at the June meeting, and about 75 basis points for the year. The small changes in pricing after the meeting suggest that the market did not glean anything particularly new from the ECB's decisions and communications, but the rather non-committal stance poses greater spillover risks. We would consider it elevated. America.
That said, there is a view that we could see policy divergence between the ECB and the Fed in the coming months, potentially putting further pressure on the 10-year UST-Bund spread, which widened to 210bp after the meeting. Nothing will change. However, spread widening could be a little more modest than it would have been if the ECB had expressed more confidence in domestic inflation trends and the potential for easing beyond June.
