ECB preview: Is this the bottom for monetary policy rates?

The European Central Bank (ECB) will be alone this week in delivering its latest monetary policy decision, with the next Federal Reserve, Bank of England and Bank of Japan meetings not until the week commencing June 16. At present, the Bloomberg consensus and market levels are fully pricing in a 25bp rate cut, which would take the deposit rate to 2%. We agree.

While the meeting itself might not make into the annals of history, it is worth considering that this cut might make the ECB the first developed market central bank to reach its terminal rate, i.e. the lowest point reached in a given cycle. It goes without saying that the word “might” is of paramount importance, as tariff headlines will continue to impact macro forecasts. In any case, at 2% the deposit rate would be bang in the middle of the 1.75%-2.25% range the ECB considers to be its best estimate of the neutral rate – where rates neither stimulate nor restrict growth – for the Eurozone. Interestingly, the latest Bloomberg consensus survey carried out May 23-28 indicates that 56% of forecasters see the neutral rate at 2%, with only respondent considering the neutral rate to be below 2%; the vast majority put the rate between 2% and 2.25%.

Market pricing points to a trough in the monetary policy rate by mid-2026 at just below 1.6%, which is both below the ECB’s neutral range and below the Bloomberg consensus median of 1.75% for the terminal rate this cycle. However, it is worth keeping in mind that the market pricing embedded in the yield curve shouldn’t be treated as a base case – it is a weighted average of different scenarios. When markets are faced with a binary macro situation with a severe tail scenario (in this case no US-Eurozone trade deal and enormous tariffs hitting growth badly), then that scenario drags down the median while not necessarily being the market’s base case. Time will tell if this week’s cut is the last one of this cycle, but it is clear that under a base case scenario of some sort of agreement regarding tariffs, we are close to the end of the cutting cycle. While the threat of the tail scenario is real, it is quite possible that the tariff situation yields a limited agreement between the US and the Eurozone, with only small negative consequences for growth in Europe that have been well flagged by now, and therefore the ECB has no need to continue cutting.

Another important feature of this week’s meeting will be the ECB staff projections, and what they have to say about possible tariff scenarios. These are produced quarterly by ECB staff and though they do not represent the views of the ECB Governing Council, they are of course considered by its members when making monetary policy decisions. The Q1 staff projections forecast 2025 GDP growth to be 0.9% and inflation to average 2.3%, with the latter hovering at around 2.0% from the start of 2026. These numbers included tariffs announced up until February 19 (the cut-off date for the Q1 forecasts) and therefore did not consider tariffs imposed on steel and reciprocal tariffs more broadly. This week’s numbers will give us an updated median point for these metrics, but we will be more interested to see what the projections say about more severe trade scenarios.

So, an uneventful meeting at face value as a 25bp deposit rate cut is fully priced in. But keep an eye on forward guidance and the new macro projections, as they might alter the market’s thinking on the path of monetary policy going forward.