ECB Cuts Rates as Expected, Raises Inflation Outlook

This
is
the
first
interest
rate
cut
in
eight
years
and
follows
ten
rate
hikes
since
the
Frankfurt-based
institution
began
its
rate
hiking
cycle
in
July
2022.

Markets
are
currently
pricing
in
a
12%
likelihood
of
a
further
ECB
cut
at
its
July
18
meeting,
and
a
63.4%
chance
of
a
cut
in
September.
Whether
there’ll
be
a
third
cut
in
2024
is
hotly
debated
and
markets
are
no
longer
pricing
in
more
than
two
cuts.

“The
last
thing
the
ECB
would
want
to
do
is
to
have
to
raise
rates
if
next
month’s
inflation
numbers
flare
up
again.
So
the
cure
is
to
not
be
rushed
into
decisions”,
said
Michael
Field,
European
markets
strategist
at
Morningstar.
“We’ve
come
a
long
way
from
the
10.6%
highs
in
inflation,
witnessed
just
18
months
ago,
and
at
this
point
lower
interest
rates
seem
appropriate.”

Equity,
bond
and
currency
markets
reactions
were
muted
as
the
move

had
been
widely
anticipated.

The
interest
rate
on
the
main
refinancing
operations
and
the
interest
rates
on
the
marginal
lending
facility
and
the
deposit
facility
will
be
revised
down
by
0.25
percentage
points
each
to
4.25%,
4.50%
and
3.75%
respectively,
effective
June
12,
according
to
the
statement.

ECB
Revises
Up
Inflation
Forecast

The
latest
Eurosystem
staff
projections
for
both
headline
and
core
inflation
have
been
revised
up
for
2024
and
2025
compared
with
the
March
projections.
Staff
now
see
headline
inflation
averaging
2.5%
in
2024,
2.2%
in
2025
and
1.9%
in
2026.
For
inflation
excluding
energy
and
food,
staff
project
an
average
of
2.8%
in
2024,
2.2%
in
2025
and
2.0%
in
2026.
Economic
growth
is
expected
to
pick
up
to
0.9%
in
2024,
1.4%
in
2025
and
1.6%
in
2026.

ECB
Precedes
Fed
Policy
Decision

The
ECB
governing
council
wrote
history
as
it
was
the
first
time
that
the
European
bank
acted
ahead
of
its
U.S.
counterpart
in
a
rate
move.
But
the
cut
followed
similar
moves
of
other
major
Western
central
banks.
The
Swiss
National
Bank
(SNB)
was
the
first
major
bank
to
announce
a
rate
cut
in
March,
followed
by
Sweden’s
Riskbank
in
May.
Yesterday,

the
Bank
of
Canada
announced
it
will
cut
its
overnight
rate
to
4.75%
after
six
consecutive
pauses.

The
US
Federal
Reserve
(Fed)
and

Bank
of
England
(BoE)
will
announce
their
monetary
policy
decision
on
June
12
and
20,
respectively.
In
the
US,
rate
cuts
are
delayed
owing
to
first
quarter
inflation
surprise,
says
Preston
Caldwell,
Morningstar’s
US
economist.
“Our
year-end
2024
federal
funds
rate
expectation
moves
to
4.75%-5.00%
from
4.25%-4.50%
previously.”

How
Far
Will
European
Interest
Rates
Fall?

Most
analysts
agree
that
the
ECB
will
keep
rates
unchanged
at
its

July
18
meeting,
but
resume
cuts
at
a
slow
pace
of
0.25
percentage
points
at
its
September
12
meeting.

“Had
the
ECB
not
telegraphed
the
rate
cut
this
week
so
emphatically,
we
believe
that
there
would
have
been
a
heated
debate
around
whether
to
wait
for
more
data
following
the
less
than
supportive
wage
and
inflation
prints
over
the
last
couple
of
weeks.
It
is
highly
likely
that
Lagarde
will
guide
markets
to
a
hold
at
July,
with
the
next
adjustment
either
in
September
or
October”,
Dave
Chappell,
Senior
Fund
Manager,
Fixed
Income
at
Columbia
Threadneedle
Investments,
said
in
a
note
ahead
of
today’s
ECB
decision.

Karsten
Junius,
Chief
Economist
at
J.
Safra
Sarasin
Sustainable,
agrees
that
a
September
rate
cut
is
the
most
likely
scenario.
“We
believe
that
monetary
policy
has
been
too
restrictive
for
too
long.
We
therefore
expect
further
rate
cuts
in
September,
October
and
December,
towards
a
level
of
3.0%
by
the
end
of
the
year.
For
their
part,
the
markets
are
currently
pricing
in
a
level
of
3.3%
for
December”,
he
said
in
a
note
prior
to
today’s
meeting.

“In
our
view,
financial
markets
do
not
expect
sufficient
rate
cuts
this
year.
The
euro
area
clearly
differs
from
the
United
States
and
we
expect
the
ECB
to
act
independently
of
the
Federal
Reserve
and
according
to
its
domestic
needs.”

Kathleen
Brooks,
research
director
at
XTB,
expects
two
more
cuts
this
year.
“The
market
is
currently
pricing
in
the
prospect
of
two
further
rate
cuts
this
year,
and
rates
in
the
Eurozone
are
expected
to
end
2024
at
3.25%,
compared
with
4.84%
for
the
US”,
she
said.

How
Will
Interest
Rate
Cuts
Affect
Markets?

Equity
markets
tend
to
rise
on
anticipated
rate
cuts,
while
bond
markets
tend
to
suffer.
On
the
other
hand,
with
interest
rates
already
high,
falling
rates
also
mean
lower
bond
yields,
which
pushes
bond
prices
higher.
Lower
rates
also
make
existing
bonds,
and
particularly
those
already
issued
during
a
period
of
high
rates,
more
attractive
for
yields.

Meanwhile
cash
savings
rates
on
bank
accounts
will
likely
decrease,
to
the
detriment
of
savers.
Borrowers,
by
contrast,
stand
to
benefit
from
lower
rates
as
consumer
debt
and
mortgages
become
cheaper.
In
its
latest
Economic
Bulletin,
the
ECB
said
lending
rates
on
business
loans
have
already
declined
slightly,
to
5.2%
in
late
2023,
while
mortgage
rates
increased
further
to
4.0%.

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