Although inflationary pressures in the eurozone still exist, the European Central Bank cut interest rates by 25 basis points as scheduled at 20:15 Beijing time on Thursday, lowering the three major interest rates to 4.25%, 3.75% and 4.50% respectively. This is the first rate cut since 2019 and the second central bank among G7 member countries to cut interest rates. In addition, the European Central Bank reiterated its plan to reduce the investment portfolio of the emergency anti-epidemic bond purchase program (PEPP) in the second half of 2024.
After the ECB's interest rate decision was announced, the euro rose against the dollar in the short term, recovering all the losses during the day and hitting 1.09. The money market had already fully digested the expectation that the central bank would cut interest rates by 25 basis points at its June meeting.
"Based on the latest assessments of the inflation outlook, underlying inflation dynamics and the strength of the transmission of monetary policy, after keeping interest rates unchanged for nine months, it is now time to ease the constraints on monetary policy," the ECB's Governing Council said in a statement.
The latest quarterly forecasts for economic growth and inflation released by ECB staff have also attracted much attention. Compared with the forecasts in March, ECB staff have raised their GDP growth and inflation forecasts for 2024, with inflation expected to be 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026. (The forecasts in March were 2.3%, 2.0%, and 1.9%, respectively); GDP growth is expected to be 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026. (The forecasts in March were 0.6%, 1.5%, and 1.6%, respectively).
The ECB said that since the ECB meeting in September 2023, the inflation rate has fallen by more than 2.5 percentage points and the inflation outlook has improved significantly. However, inflation is likely to remain above target well into next year. The ECB will keep interest rates sufficiently restrictive for as long as necessary. The central bank reiterated that it would continue to take a "data-dependent, meeting-by-meeting approach" to making policy decisions. A key sentence in the new guidance is that the ECB "will not pre-commit to a specific interest rate path."
Investors will next focus on ECB President Christine Lagarde’s comments at a press conference at 20:45. She said last month that she was “very confident” that eurozone inflation was under control. However, data released last week showed that inflation accelerated to 2.6% in May for the first time this year.
The ECB's rate cut comes a day after the Bank of Canada followed suit. In contrast, the Federal Reserve is expected to keep interest rates in a high range next week as price pressures in the world's largest economy have proven more stubborn than expected. The Bank of England is also seen as unlikely to cut its bank rate from a 16-year high when it meets in June. However, Lagarde said at her last press conference that ECB officials are "data-dependent, not Fed-dependent."
Traders maintained their expectations of a rate cut after the ECB's latest rate decision, with another 40 basis points expected this year. Money markets are pricing in a (further) 59 basis point cut in ECB rates in 2024, compared with 64 basis points before the ECB statement.
Analyst Vassilis Karamanis said the fact that the ECB cut rates while raising inflation expectations could keep the discussion of policy mistakes going. Given the communication of policymakers before the decision, doing nothing could cause a credibility crisis. But for some, it could remind them of July 2008, when the ECB raised interest rates on the eve of the global financial crisis.
Analyst Alexander Weber believes that it is difficult to say exactly what the new guidance means for the pace of rate cuts this year. It seems very cautious and is roughly consistent with the recent comments of some hawkish officials. It certainly does not sound like there will be consecutive rate cuts in July.
Although inflationary pressures in the eurozone still exist, the European Central Bank cut interest rates by 25 basis points as scheduled at 20:15 Beijing time on Thursday, lowering the three major interest rates to 4.25%, 3.75% and 4.50% respectively. This is the first rate cut since 2019 and the second central bank among G7 member countries to cut interest rates. In addition, the European Central Bank reiterated its plan to reduce the investment portfolio of the emergency anti-epidemic bond purchase program (PEPP) in the second half of 2024.
After the ECB's interest rate decision was announced, the euro rose against the dollar in the short term, recovering all the losses during the day and hitting 1.09. The money market had already fully digested the expectation that the central bank would cut interest rates by 25 basis points at its June meeting.
"Based on the latest assessments of the inflation outlook, underlying inflation dynamics and the strength of the transmission of monetary policy, after keeping interest rates unchanged for nine months, it is now time to ease the constraints on monetary policy," the ECB's Governing Council said in a statement.
The latest quarterly forecasts for economic growth and inflation released by ECB staff have also attracted much attention. Compared with the forecasts in March, ECB staff have raised their GDP growth and inflation forecasts for 2024, with inflation expected to be 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026. (The forecasts in March were 2.3%, 2.0%, and 1.9%, respectively); GDP growth is expected to be 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026. (The forecasts in March were 0.6%, 1.5%, and 1.6%, respectively).
The ECB said that since the ECB meeting in September 2023, the inflation rate has fallen by more than 2.5 percentage points and the inflation outlook has improved significantly. However, inflation is likely to remain above target well into next year. The ECB will keep interest rates sufficiently restrictive for as long as necessary. The central bank reiterated that it would continue to take a "data-dependent, meeting-by-meeting approach" to making policy decisions. A key sentence in the new guidance is that the ECB "will not pre-commit to a specific interest rate path."
Investors will next focus on ECB President Christine Lagarde’s comments at a press conference at 20:45. She said last month that she was “very confident” that eurozone inflation was under control. However, data released last week showed that inflation accelerated to 2.6% in May for the first time this year.
The European Central Bank's rate cut came a day after the Bank of Canada made a similar move. In contrast, the Federal Reserve is expected to keep interest rates unchanged at a high range next week as it has proven to be