So the ECB faces a delicate balance: cutting too much could stoke inflation on the upside, but being too cautious might allow inflation to fall below its target for too long.

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📈 Implications for policy & markets

• The ECB may become more data dependent, emphasizing each meeting’s outlook. 

• If downside risks strengthen, some ECB members may favor further rate cuts (or at least signal openness to them). Lane has said rising likelihood of inflation undershooting would “strengthen the case” for a lower rate. 

• But policymakers like Kazimir argue against overreacting to small deviations — continuity and stability are also important. 

• Markets may price in more limited interest rate cuts, given uncertainty about inflation’s path and ECB’s “symmetric” approach to inflation deviations. 

• A sustained undershoot in inflation could weaken the euro, particularly if the U.S. or other central banks maintain higher rates.

• For bond and equity markets: fixed income could rally (lower yields) if rate cuts are expected; equities might benefit if central banks ease, but growth weakness could offset that.

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