The European Central Bank cut its deposit facility rate by 25 basis points to 2.25% on Wednesday, the eighth reduction in the current easing cycle, matching consensus expectations. The Stoxx Europe 600 closed at a record 568.4, up 0.5% on the session, as investors absorbed President Christine Lagarde's commentary that "the disinflation process remains on track but progress requires patience."
In her press conference, Lagarde signaled a pause is likely at the June 5 meeting unless inflation data significantly surprise to the downside. "We are in a much better place than 12 months ago," she said, noting that headline HICP at 2.0% in March is at the ECB's target for the second consecutive month. Core inflation, however, remains elevated at 2.4%, with services inflation stuck above 3%.
Euro and Bond Reaction
The euro slipped 0.5% against the dollar to $1.063, the lowest since mid-February. The German 10-year Bund yield rose 4 basis points to 2.78%, while the Italian 10-year BTP eased 1 basis point to 3.51%, narrowing the BTP-Bund spread to 73 basis points — the tightest since 2021. Money markets now imply just 35 basis points of additional ECB cuts through year-end, down from 55 basis points before the decision.
The ECB upgraded its 2026 GDP forecast to 1.1% from 0.8%, citing AI-related private investment. Headline HICP for 2026 was lowered to 1.9% from 2.1%; core inflation forecast was held at 2.2%. The 2027 growth projection remained at 1.4%. Lagarde flagged that euro-zone industrial output, particularly in Germany, faces continued headwinds from energy costs and U.S. tariff policy.
Sector Rotation
European banks benefited from the steeper-yield-curve effect, with the Stoxx 600 Banks index up 1.2% led by BNP Paribas (BNP.PA) +1.8% and Banco Santander (SAN.MC) +1.4%. Auto stocks lagged amid renewed concerns about U.S. tariff policy on European vehicles, with BMW (BMW.DE) -1.1% and Stellantis (STLA) -0.9%. Luxury names LVMH (MC.PA) and Hermès (RMS.PA) closed flat ahead of Q1 results.
Outlook
JPMorgan euro-zone economist Greg Fuzesi expects "one more 25 bp cut in September if growth disappoints, otherwise a hold through year-end." The euro's downside is contained at $1.05 absent further dollar strength, while the Stoxx 600 has scope for further upside if Q1 European earnings — including HSBC, Deutsche Bank, and Volkswagen this week — meet expectations. Lagarde's next major signal opportunity is the May 21 ECB Forum at Sintra.