ECB Cuts Rates as Expected, Raises Inflation Outlook

Morningstar

In a widely-expected policy decision, the European Central Bank (ECB) today announced a 0.25 percentage point cut of major interest rates, citing lower inflation. But “domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year”, the introductory statement read.

ECB president Christine Lagarde did not provide guidance on a future rate cut path echoeing previous statements that the ECB’s governing council will follow a data-dependent, meeting-by-meeting approach.

“Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady”, the introductory statement read.

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

The full article is available here. This article was published at Morningstar Economics.