June 13, 2024

European Central Bank set to cut rates for the first time since 2019

President of the European Central Bank (ECB) Christine Lagarde arrives to tackle a press convention following the assembly of the governing council of the ECB in Frankfurt am Main, western Germany, on April 11, 2024. 

Kirill Kudryavtsev | Afp | Getty Images

FRANKFURT — The European Central Bank this week is set to cut borrowing prices for the euro space for the first time since September 2019.

It will mark the official finish to the report fast-hiking cycle that begun after the Covid-19 pandemic as inflation soared increased. But buyers’ consideration appears prefer it has already moved on to what is going to occur after this June cut by the Frankfurt establishment.

“Judging by the commentary from officials, there is no questioning of the wisdom of cutting rates on 6 June,” mentioned Mark Wall, ECB watcher with Deutsche Bank.

“Even with the upside surprise on May HICP [harmonized index of consumer prices], the ECB can argue a cut is consistent with its reaction function. The question is, what comes after June?”

Euro area inflation for May got here in barely increased than anticipated with headline inflation at 2.6% and the print for core at 2.9%. On high of that, negotiated wage development — a determine intently watched by the ECB — did reaccelerate in the first quarter to 4.7% after hitting 4.5% in in the fourth quarter of 2023.

Former ECB President Jean-Claude Trichet on prospect of rate cuts in Europe

“Many of these data are distorted by one-off effects,” mentioned the chief economist of Berenberg, Holger Schmieding.

“For example. a mild winter had boosted Q1 [first quarter] outdoor construction and thus real GDP while one-off payments raised wages more than usual in some countries such as Germany early this year.”

But whereas one other price cut in July can’t be dominated out, given the latest commentary from ECB policymakers it would not appear very probably. 

“We see that some elements of inflation are proving persistent — especially domestic inflation, and services in particular,” European Central Bank board member Isabel Schnabel mentioned in an interview with the German public broadcaster ARD on May 16.

UBP strategist: We expect the ECB to cut rates next week

“I would caution against moving too quickly because there is a risk of cutting interest rates too fast. And we should definitively avoid that,” she mentioned. 

Next on this bumpy highway can be the divergence between the ECB and U.S. Federal Reserve’s personal price setting which appears extra like “higher for longer.” This just isn’t a simple process because it might have robust implications for the euro-dollar trade price which feeds into inflation by way of the costs for imported items and companies.

“In 6-12 months time, when under our assumptions the Fed-ECB policy rate differential is rising to historically high levels, FX depreciation might have a strong pass-through in inflation if, as expected, domestic demand is stronger, profit margins are narrower and policy rates are less restrictive,” Mark Wall defined.

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