European Central Bank President Christine Lagarde gestures while speaking at a press conference following the ECB’s monetary policy meeting in Frankfurt, Germany, June 6, 2024 | Photo source: Reuters
On June 6, the European Central Bank cut interest rates for the first time in five years, but left investors in the murky about its next move given growing uncertainty over inflation after a edged slowdown last year.
The ECB cut its record deposit rate by 25 basis points to 3.75%, joining the central banks of Canada, Sweden and Switzerland in starting to phase out some of the sharpest interest rate increases aimed at stemming a post-pandemic surge in inflation.
The well-signposted June 6 move is seen as the start of a monetary easing cycle, but persistent price and wage pressures cloud the outlook and could force the euro zone central bank to wait months before cutting rates again.
“The Governing Council will continue to rely on data and determine the appropriate level and duration of restrictions at each meeting,” the ECB said in a statement.
While the ECB has left its options open for July, a number of influential policymakers, including board member Isabel Schnabel and Dutch central bank chief Klaas Knot, have already justified a pause next month by suggesting the next opportunity to ease monetary policy will come in June.
Economists expect two more interest rate cuts from the ECB this year, most likely in September and December, while markets are pricing in one to two more moves – a huge change from the start of the year, when more than five cuts were expected.
“Decisions on interest rates will be based on an assessment of the inflation outlook in the airy of incoming economic and financial data, the dynamics of core inflation and the strength of monetary policy transmission,” the ECB added. “The Governing Council does not commit in advance to a specific interest rate path.”
Conservative policymakers, who still appear to have a majority in the Governing Council, which sets interest rates, argue that the ECB is in no rush to cut rates because the economic rebound proves that high rates do not hamper growth.
Some of their caution may stem from unexpectedly persistent inflation. Indeed, the ECB on Thursday raised its inflation projection for 2025 to 2.2% from 2.0%.
“Despite progress in recent quarters, domestic price pressures remain powerful as wage growth continues to rise, and inflation is likely to remain above target well into next year,” the ECB said.
Some economists say the biggest risk to a plan to cut interest rates is actually the U.S. Federal Reserve, not wages and inflation.
The Fed has clearly signaled a delay in easing policy, and a further delay in US interest rate cuts is likely to make the ECB also more cautious, as a widening interest rate differential would weaken the euro and raise imported inflation.
Attention now turns to ECB President Christine Lagarde’s press conference, where she is likely to be grilled about the ECB’s likely next moves.
