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

 

 

 

 

 

 

 

 

 

 

Figure 2: Traders slash ECB rate cut bets, Source: Reuters

 

 

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.

 

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.

 

 

 

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