ECB Expected to Cut Rates for the First Time Since 2019
ECB Expected to Cut Rates for the First Time Since 2019
Two years ago, the European Central Bank (ECB) was criticized for being late to the party when the world’s major central banks began raising interest rates to combat the fiercest inflation surge in a generation. But it looks like the central bank won’t be late when it comes to cutting them.
The European Central Bank is expected to cut interest rates at its June 6 meeting, as widely signaled in recent weeks by its policymakers.
This will mark the first cut since March 2016 for both the main refinancing operations rate and the marginal lending rate. For the deposit rate, it will be the first reduction since September 2019.
Will the ECB continue to cut rates after June?
Despite the widely anticipated rate cut in June, recent remarks from ECB officials suggest there will be no pre-commitment to future cuts afterward.
Data released on Friday showed that headline and core inflation (excluding volatile food and energy prices) both accelerated more than expected in May. Eurozone inflation also edged higher in the same month, reaching 2.6% above the expected 2.5%, while core inflation rose to 2.9% from 2.7% in April.
Figure 1: Eurozone: Key interest rate and inflation over five years, Source: Morning Star
Money markets are currently pricing in 43 basis points of ECB cuts by September and approximately 60 basis points by the end of the year. As a result, market expectations are caught between predicting 2-3 ECB rate cuts in 2024.
Figure 2: Traders slash ECB rate cut bets, Source: Reuters
traders will listen carefully to Lagarde's press conference and the ECB staff's new macroeconomic forecasts, looking for signals on the pace of rate cuts after June and, in particular, a possible second cut at the July 18 meeting
Will the ECB Cut Before the Fed?
Also, weighing on the ECB's move in June is the possible divergence from the Fed. The Federal Reserve is expected to delay rate cuts, and the market no longer anticipates a cut in July. This could widen the rate differential between the US and Europe, potentially causing funds to flow to the US and weakening the euro.
The ECB institution has repeatedly said in recent months that it is independent of the US central bank, but economists are debating how far monetary policies on both sides of the ocean can really diverge.
Analysts explain that a sharp divergence could weaken the single currency against the dollar, with potential upside risk to inflation forcing the ECB to become more cautious.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFl makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.
Two years ago, the European Central Bank (ECB) was criticized for being late to the party when the world’s major central banks began raising interest rates to combat the fiercest inflation surge in a generation. But it looks like the central bank won’t be late when it comes to cutting them.
The European Central Bank is expected to cut interest rates at its June 6 meeting, as widely signaled in recent weeks by its policymakers.
This will mark the first cut since March 2016 for both the main refinancing operations rate and the marginal lending rate. For the deposit rate, it will be the first reduction since September 2019.
Will the ECB continue to cut rates after June?
Despite the widely anticipated rate cut in June, recent remarks from ECB officials suggest there will be no pre-commitment to future cuts afterward.
Data released on Friday showed that headline and core inflation (excluding volatile food and energy prices) both accelerated more than expected in May. Eurozone inflation also edged higher in the same month, reaching 2.6% above the expected 2.5%, while core inflation rose to 2.9% from 2.7% in April.
Figure 1: Eurozone: Key interest rate and inflation over five years, Source: Morning Star
Money markets are currently pricing in 43 basis points of ECB cuts by September and approximately 60 basis points by the end of the year. As a result, market expectations are caught between predicting 2-3 ECB rate cuts in 2024.
Figure 2: Traders slash ECB rate cut bets, Source: Reuters
traders will listen carefully to Lagarde's press conference and the ECB staff's new macroeconomic forecasts, looking for signals on the pace of rate cuts after June and, in particular, a possible second cut at the July 18 meeting
Will the ECB Cut Before the Fed?
Also, weighing on the ECB's move in June is the possible divergence from the Fed. The Federal Reserve is expected to delay rate cuts, and the market no longer anticipates a cut in July. This could widen the rate differential between the US and Europe, potentially causing funds to flow to the US and weakening the euro.
The ECB institution has repeatedly said in recent months that it is independent of the US central bank, but economists are debating how far monetary policies on both sides of the ocean can really diverge.
Analysts explain that a sharp divergence could weaken the single currency against the dollar, with potential upside risk to inflation forcing the ECB to become more cautious.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFl makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.
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