The European Central Bank (ECB) cuts interest rates to 3.75% for the first time in five years, aligning with Canada, Sweden, and Switzerland, and anticipating the Federal Reserve (FED).
Let’s see all the details below.
ECB follows Canada, Sweden, and Switzerland, anticipating the FED and cuts interest rates
As anticipated, the European Central Bank (BCE) has reduced interest rates by a quarter of a percentage point for the first time in five years during the governing council meeting in Frankfurt.
At the same time, it has revised upwards the inflation forecasts for this year and for 2025. As widely expected, financing costs in the Eurozone have been lowered from the record level of 4% to 3.75%.
The BCE has thus aligned itself with the central banks of Canada, Sweden, and Switzerland in cutting rates, far surpassing the Federal Reserve (FED) of the United States.
In the morning, the money markets indicated a 92% probability of a rate cut, against an 8% chance that they would remain unchanged. This represents the first rate cut since September 2019.
The interest rate on main refinancing operations has been reduced from 4.5% to 4.25%. This is the rate that banks pay when they borrow money from the ECB for a week.
The third reference rate, the rate on marginal refinancing lines, has been lowered from 4.75% to 4.5%.
These measures have been adopted while the ECB makes progress in the fight against high inflation in the Eurozone, which has fallen from a peak of over 10% at the end of 2022 to 2.6% year-on-year until May.
Currently, inflation is just above the 2% target, the lowest level since July 2021. In a statement, the ECB said the following:
“The Governing Council decided today to lower the three key ECB interest rates by 25 basis points. Based on an updated assessment of the inflation outlook, underlying inflation dynamics, and the effectiveness of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy tightening after nine months of rate stability.”
Statements and forecasts on inflation
In other words, what just a few weeks ago seemed like the beginning of an important cycle of monetary easing now appears more uncertain.
This is due to signals indicating that inflation could be more persistent than expected in the euro area, similar to the situation in the United States. HSBC economist Fabio Balboni indeed stated in a note:
“Further cuts in September and December remain our main scenario. However, if the recent resilience of inflation in services persists, the chances will increase that the ECB will have to be more cautious in reducing rates.”
The majority of economists still predict two further rate cuts by the end of the year, while the markets have priced in only one or two more moves.
This represents a big change compared to the beginning of the year, when more than five rate cuts were expected in 2024.
On Thursday, the BCE predicted that overall inflation will average 2.5% in 2024, then decrease to 2.2% in 2025.
Three months ago, an average inflation of 2.3% was expected in 2024, before reaching the target of 2% in 2025. Policymakers still expect inflation to fall to 1.9% in 2026.
The Bank of England (BoE) is now under pressure to closely align with the ECB’s action on rates. The next meeting of the Monetary Policy Committee will be held in two weeks.
However, the decision of Prime Minister Rishi Sunak to call the general elections for July 4th means that the City expects a rate cut later in the summer, once the elections are over. September is now considered the most likely time.
But James Smith, economist of developed markets at ING, stated:
“Do not take for granted that the Bank will not move in June just because there are elections. The independence of the BoE is a well-established principle respected by the main parties, and a rate cut was announced long before the elections were called.”
The central banks start a cycle of monetary easing
As explained above, the central banks of the major economies have started to reduce interest rates, with the ECB and the Danish central bank lowering their benchmark rates by 25 basis points.
Even the Bank of Canada cut rates at the beginning of the week, while the Swiss central bank did the same in March.
The big unknown concerns the United States Federal Reserve: will it join the trend of cuts?
Despite some members of the Fed suggesting that an easing might occur only in 2025, recent data indicates a slowdown in both inflation and economic growth.
At the end of the month, the new inflation data will also arrive. QCP, in a market update, stated:
“The CPI (Consumer Price Index) that will be published next week could be the trigger for a new all-time high for BTC. It could also give further momentum to the rally as the market prices in rate cuts.”
Geoffrey Kendrick, head of forex research and digital assets at Standard Charter, confirmed his price target of $150,000 for BTC by the end of the year in a report on Thursday.
Emphasizing specifically the possibility of a breakout to new all-time highs in the coming days:
“If tomorrow’s payroll data is favorable, I would expect a new all-time high over the weekend.”
