ECB Rates Decision: What to Expect on July 18

Analysts
anticipate
that
two
more
rate
cuts
of
0.25
percentage
points
each
are
on
the
table
this
year,
in
September
and
December.
Financial
markets
are
currently
pricing
in
0.4
percentage
points
in
total
rate
cuts
until
year-end,
leaving
some
uncertainty
whether
the
bank
will
impose
a
second
cut
in
December.

“The
ECB
has
clearly
signalled
its
preference
to
make
interest
rate
decisions
at
forecast
meetings,
i.e.
in
September
and
December,
and
not
in
July,
October
or
January”,
Konstantin
Veit,
executive
vice
president
and
portfolio
manager
at
Pimco,
told
Morningstar
by
phone
on
July
11.

“Inflation
is
not
yet
where
the
ECB
wants
it
to
be,
but
I
believe
the
ECB
is
of
the
opinion
that
a
deposit
facility
rate
of
above
3%
is
still
clearly
restrictive”,
he
adds.
So
even
if
the
bank
were
to
lower
rates
twice
this
year,
it
would
still
consider
rates
to
be
sufficiently
restrictive
in
the
current
inflation
environment.

In
a

recent
Reuters
poll
of
85
economists
between
July
4-11,
all
predicted
the
ECB
will
keep
interest
rates
unchanged
on
July
18.
More
than
80%
of
respondents
expected
it
to
cut
the
deposit
rate
twice
more
this
year,
in
September
and
December,
which
would
take
it
down
to
3.25%.

In
it’s
June
meeting,
the
bank
cut
rates
to:

• Main
  refinancing
  rate:
  4.25%,
  down
  from
  4.50%
• Marginal
  lending
  facility
  rate:
  4.50%,
  down
  from
  4.75%
• Deposit
  facility
  rate:
  3.75%,
  down
  from
  4.00%

This
was
the
first
cut
of
the
main
refinancing
rate
and
marginal
lending
facility
in
eight
years.
The
deposit
facility
rate
was
last
reduced
in
2019.

Consumer
prices
in
the
eurozone
increased
by
2.5%
in
June
year
on
year,
down
from
2.6%
in
May,
but
higher
than
economists’
expectations
of
a
2.4%
rise.
Core
inflation,
which
shows
prices
without
energy
and
food
costs,
came
in
2.9%
over
a
year
earlier,
the
same
level
as
in
May,
but
higher
than
the
2.7%
rate
seen
in
April.

Rate
Cuts
Expected
at
0.25
Percentage
Point
Steps

Pimco’s
Veit
adds
that
he
anticipates
cuts
to
come
at
conventional
0.25
percentage
point
steps,
given
the
amount
of
uncertainty
about
the
eurozone
economy
and
about
the
next
steps
of
the
US
Federal
Reserve.

The
ECB
can
cut
rates
independently
of
the
Fed,
but
the
point
is
that
inflation
is
highly
correlated
globally–
if
it
turns
out
the
Fed
can’t
cut
because
inflation
proves
to
be
more
sticky
than
anticipated,
it
is
unlikely
that
the
ECB
has
no
inflation
problem,
he
said.

Morningstar
strategist
Michael
Field
also
believes
the
ECB
will
take
a
cautious
approach
to
lowering
rates.
“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”,
he
said.
“After
the
bank
lowered
rates
just
in
June,
another
rate
cut
this
week
would
be
too
soon.”

DWS’s
Europe
economist
Ulrike
Kastens
told
Morningstar
by
phone
on
June
10
that
she
does
not
expect
the
ECB
to
announce
any
cuts
at
its
next
meeting,
and
that
she
does
not
expect
any
comments
on
potential
policy
moves
in
September.
“As
there
are
no
new
projections
on
growth
and
inflation,
there
should
be
no
changes
in
communication:
President
Christine
Lagarde
will
again
stress
that
the
council
will
act
data
dependent,
and
that
decisions
are
made
on
a
meeting-to-meeting
basis.”
DWS
also
expects
cuts
at
0.25
percentage
points
each
in
September
and
December.
“Moderate
wage
data
in
the
second
quarter
of
2024
should
allow
a
further
rate
cut
in
September”,
Kastens
added.

How
Low
Will
the
ECB
Cut
Interest
Rates?

If
analysts’
consensus
proves
accurate,
the
main
refinancing
and
deposit
facility
rates
would
stand
at
3.75%
and
3.25%,
respectively,
at
the
end
of
the
year.
But
they
do
not
expect
that
to
be
the
end
of
the
rate
cutting
cycle.
Currently,
the
market
prices
in
a
terminal
deposit
facility
rate
of
2.5%,
implying
that
three
more
0.25
percentage
point
cuts
might
be
on
the
horizon
in
2025.

However,
the
ECB
has
communicated
that
it
sees
the
neutral,
terminal
rate
at
2%.

“At
the
moment
the
market
is
pricing
in
a
terminal
rate
of
2.5%,
and
the
question
is
whether
that
is
realistic
or
not”,
Pimco’s
Veit
said.
“I
think
the
2.5%
is
well
above
most
estimates
for
the
neutral
rate,
which
the
ECB
sees
at
around
2%.
We
read
this
as
the
market
expecting
inflation
to
be
more
persistent
than
expected,
therefore
pricing
in
a
higher
interest
rate.”

How
Will
Interest
Rate
Cuts
Affect
Markets?

Equity
markets
tend
to
rise
on
anticipated
rate
cuts.
In
bond
markets,
falling
interest
rates
mean
lower
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
that
financing
costs
have
plateaued
at
restrictive
levels.
The
average
interest
rates
on
new
loans
to
firms
and
on
new
mortgages
were
unchanged
in
April
compared
to
the
previous
month,
at
5.2%
and
3.8%
respectively.

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