Will the ECB Cut Interest Rates on April 11?

Since
September
2023,
the
ECB
has
kept
its
key
interest
rate
–
known
as
the
main
refinancing
operations
rate
or
MRO
–
at
a
record
high
of
4.5%.

Stock
and
Bond
Markets
Expect
a
June
Rate
Cut

Money
markets
are
anticipating
a
first
rate
cut
of
25
basis
points
in
June,
with
three
more
rate
reductions
priced
in
to
follow
by
the
end
of
2024.
A
recent
Reuters
poll
showed
that
roughly
90%
of
economists
surveyed
expect
the
first
interest
rate
cut
in
June.

“Inflation
has
fallen
materially,
and
is
now
within
touching
distance
of
central
banks’
targeted
levels.
Meaning,
soon
there
will
be
no
reason
not
to
cut
interest
rates,
if
indeed
inflation
is
under
control,”
said
Morningstar’s
European
market
strategist
Michael
Field. 

ECB
council
members
have
also
done
their
part
to
fuel
that
expectation.
The
governor
of
Spain’s
central
bank
Pablo
Hernandez
de
Cos
told
Bloomberg
earlier
this
week
that
his
“central
scenario
is
that
June
could
actually
be
the
first
reduction”.
The
governor
of
France’s
central
bank,
Francois
Villeroy
de
Galhau,
echoed
the
sentiment,
saying
the
bank
will
start
with
a
“moderate”
interest
rate
cut
this
spring,
Reuters
reports.

Will
ECB
Council
Members
Delay
Too?

Meanwhile
on
the
other
side
of
the
Atlantic,
the
chairman
of
the
US
Federal
Reserve
(Fed)
Jerome
Powell
said
on
Wednesday
that
stubbornly
high
inflation
may
keep
the
US
central
bank
from
the
anticipated
June
rate
cut.

This
has
raised
some
questions
in
Europe
if
the
ECB
will
go
ahead
with
its
own
rate
decision.
The
Frankfurt-based
bank
has
historically
been
hesitant
to
make
monetary
decisions
ahead
of
its
American
counterpart,
and
it
was
also
be
one
of
the
last
major
central
banks
to
embark
on
the
recent
hike
cycle.

Several
council
members,
including
ECB
president
Christine
Lagarde,
have
tried
to
dismiss
any
such
considerations,
saying
that
what
counts
for
the
ECB
are
its
own
inflation
and
economic
forecasts.
And
the
head
of
the
Finnish
central
bank
Olli Rehn stressed:
“The
ECB
is
not
the Fed’s
13th
Federal
District”.

His
colleague
and
head
of
Austria’s
central
bank
Robert
Holzmann,
who
is
considered
one
of
the
more
hawkish
members
of
the
council,
told
Austrian
newspaper
Kronen
Zeitung
that
the
European
economy
was
growing
more
slowly
than
its
US
counterpart
and
therefore,
Europe
could
cut
interest
rates
before
the
US.

“From
today’s
perspective,
I
would
say:
interest
rate
cuts
are
likely
to
come.
When
will
depend
largely
on
what
wage
and
price
developments
look
like
by
June,”
he
said.
The
lower
wage
agreements
in
Europe
were,
the
more
scope
there
would
be
to
reduce
borrowing
costs,
Holzmann
told
Reuters.

However,
he
also
warned
that
the
ECB
should
be
careful
in
pushing
down
rates
alone.
If
the
Fed
does
not
cut
rates
in
June,
the
market
reaction
to
the
policy
divergence
would
negate
much
of
the
benefit
of
an
ECB
cut,
he
said

in
a
recent
interview
with
Reuters.

If
the
ECB
cuts
key
interest
rates
earlier
and
lower
than
the
Fed,
the
interest
rate
gap
between
the
USA
and
the
eurozone
will
widen.
This
will
inevitably
have
an
impact
on
exchange
rates,
capital
flows
and
inflation.
Investors
are
therefore
finding
it
difficult
to
buy
the
ECB’s
claims
of
independence.

Eurozone
Inflation
Falling,
Markets
Rising

Inflation
in
the
eurozone
fell
to
2.4%
year
on
year
in
March,
down
from 2.6%
in February,
Eurostat
said
on
Wednesday.
Economists
had
been
expecting
a
flat
reading
month
on
month,
so
the
numbers
came
a
positive
surprise.
“With
inflation
now
within
spitting
distance
of
the
ECB’s
2%
targeted
level,
investors
will
be
even
more
convinced
that
interest
rate
cuts
are
on
the
near-term
horizon,”

said Michael
Field.
Core
inflation,
which
shows
prices
without
energy
and
food
costs,
also
fell
to
2.9%
year
on
year.
It
was
at
3.1%
in
February.

He
adds
that
in
many
ways
the
European
economy
sits
in
“Goldilocks”
territory,
ie
not
too
hot
and
not
too
cold.
“It’s
weak
enough
that
the
central
banks
should
not
be
concerned
about
overheating
it
by
cutting
rates.
At
the
same
time,
it
still
has
some
life
left
in
it,
judging
by
recent
data
points
showing
upticks
in
mortgage
lending
and
service-industry
activity.
Meaning,
that
stimulus
here,
in
the
form
of
rate
cuts,
could
effectively
kindle
economic
growth.”

This
is
not
to
say
that
Europe
is
bouncing
back
yet;
there
is
a
lag
effect.
“Even
if
central
banks
soon
implement
interest-rate
cuts,
they
will
take
some
time
to
feed
through
to
the
economy,
with
the
ECB
forecasting
just
0.6%
growth
in
2024.”

Recent
rallies
on
equity
markets
have
not
been
led
by
a
blowout
earnings
season
or
improved
guidance
from
companies,
he
adds.
“Objectively,
though,
we
are
drawing
ever
closer
to
interest-rate
cuts,
which
will
certainly
stimulate
the
European
economy.”

Meaning,
soon
there
will
be
no
reason
not
to
cut
interest
rates,
if
indeed
inflation
is
under
control.
In
a
surprise
move
on
March
21,
the
Swiss
National
Bank
(SNB)
was
the
first
major
bank
to
cut
rates.

Will
the
ECB
Cut
Rates?
This
is
What
Economists
Think

We
rounded
up
some
expert
commentary
on
the
anticipated
impact
of
rate
cuts
on
markets.

Matthew
Ryan,
Head
of
Market
Strategy
at
Ebury

The
disinflationary
process
continues
to
gather
pace
in
the
Euro
Area,
which
will
be
very
welcome
news
indeed
for
European
Central
Bank
officials.
Not
only
did
the
main
inflation
measure
ease
to
its
lowest
level
in
nearly
three
years,
but
the
more
sticky
core
number
also
dropped
to
a
two-year
low
below
3%,
both
less
than
expectations.
This
should
provide
policymakers
with
confidence
that
their
actions
are
continuing
to
bear
fruit,
and
that
a
loosening
in
monetary
policy
will
soon
be
warranted.
We
now
see
a
June
interest
rate
cut
from
the
ECB
as
a
near
certainty
–
indeed
this
is
currently
fully
priced
in
by
market
participants.

Tiffany
Wilding,
Economist,
and
Andrew
Balls,
CIO
Global
Fixed
Income,
Pimco

In
the
eurozone,
we
see
expectations
for
the
ECB
and
the
level
of
10-year
yields
as
broadly
fair
versus
the
US
in
our
baseline
economic
scenario.
Yet
we
see
the
balance
of
risks
as
leaning
toward
weaker
economic
performance
and
more
easing
from
the
ECB.
We
also
prefer
the
US
dollar
over
the
euro
and
other
European
currencies
such
as
the
Swiss
franc
and
the
Swedish
krona,
anticipating
further
U.S.
economic
exceptionalism.

Robin
Winkler,
Chief
Economist
for
Germany,
Deutsche
Bank
Research:

The
spectre
of
inflation
continues
to
fade.
As
in
other
European
countries,
the
inflation
rate
in
Germany
fell
more
sharply
than
expected
in
March.
At
“only”
2.2%,
the
inflation
rate
is
well
on
the
way
to
falling
below
the
important
2%
mark,
at
least
temporarily,
by
early
summer
at
the
latest.
The
core
inflation
rate
also
fell
to
3.3%
in
March.
This
means
that
inflation
remains
high.
However,
the
positive
trend
in
both
Germany
and
the
rest
of
the
eurozone
should
encourage
the
ECB
in
its
intention
to
initiate
a
turnaround
in
interest
rates
in
June.

Jan
Viebig,
Chief
Investment
Officer,
ODDO
BHF
SE

We
are
currently
assuming
that
the
ECB
could
start
to
cut
key
interest
rates
in
summer
2024.
What
is
important
for
investors
is
not
the
month
in
which
the
central
bank
introduces
interest
rate
cuts,
but
that
a
fall
in
interest
rates
of
probably
50
to
100
basis
points
is
very
likely
this
year.
Anyone
currently
investing
money
in
the
bond
market
in
the
short
term
will
probably
only
be
able
to
reinvest
their
capital
at
lower
interest
rates
in
the
future.
We
have
therefore
increased
the
maturity
of
the
bonds
in
our
portfolios.
Short-term
investments
in
fixed-term
deposits
are
currently
associated
with
a
reinvestment
risk.
It
is
worth
thinking
about
longer-term
investments.

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