ECB Set to Cut Rates Despite Inflation Uptick

Morningstar

The European Central Bank is expected to announce its first interest rate cut in eight years on Thursday.

The eurozone’s key interest rate is forecast to fall by 0.25 percentage points to 4.25%, a cut that follows the Swiss National Bank and the Swedish Riksbank in March and May, respectively. If the ECB cuts interest rates, the central bank will have moved ahead of the Bank of England and Federal Reserve, which both hold meetings in June.

In total, markets currently price in less than 0.60 percentage points in cuts in 2024, meaning two moves with the possibility of a third. This is down from April, when markets anticipated three rate cuts, and from January, when at least five cuts were on the table, according to Reuters.  

The cut on June 6 seems a done deal but any other outcome will shock the markets on Thursday, says Michael Field, European market strategist at Morningstar.   

Eurozone Inflation Ticks Up

The anticipated cut comes despite the recent flare-up in eurozone consumer prices. Inflation had fallen close to the bank’s 2% target, but both headline and core inflation numbers for May came in above expectations, marking the first month-on-month acceleration of 2024.  

Eurozone inflation rose to 2.6% year on year, from 2.4% in April, Eurostat said on May 31. Core inflation, which shows prices without energy and food costs, also accelerated to 2.9%, from 2.7% in April. 

Will the ECB Cut Rates Again in July?

Thursday’s rate announcement will be closely watched for any signs of what happens beyond June, with markets now looking ahead to the July 18 meeting.  

“It is understandable that the bank does not want to rush into mass rate cuts and potentially have to reverse course if inflation rises much further,” says Field.

“Whether more rate cuts follow this year, or early next year, will likely not move the needle either way. The ECB has indicated its desire to reduce rates, so while the timing of rate cuts is not yet 100% clear, the direction of travel is at least.”  

Konstantin Veit, portfolio manager at Pimco, doubts the ECB will give much guidance on Thursday, and expects that the council to reaffirm its meeting-by-meeting approach and reliance on the data.

“We therefore believe it is unlikely that the ECB will commit to a specific interest rate path”, he says. However, Pimco expects a cautious approach, with 0.25 percentage point moves.

Marco Wagner of Commerzbank Economic Research said in a May 31 note: “There is certainly a risk that

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