Quick Bites | ECB kicks off rate cut cycle

The European Central Bank (ECB) joined the growing group of advanced economy central banks that have begun their monetary easing cycles, lowering its deposit rate by 25 basis points to 3.75%. Other central banks to have cut include the Swiss National Bank, Sweden’s Riksbank and the Bank of Canada.

ECB policymakers cited the past drop in inflation and the improving inflation outlook as key factors behind their decision to lower interest rates. There were some elements of caution, however, as the ECB said domestic price pressures remain strong as wage growth is elevated and revised up its near-term inflation forecasts.

We view the ECB’s statement as consistent with further rate cuts, albeit at a measured pace. The ECB said it will continue to follow a “data-dependent and meeting-by-meeting approach” in determining its interest rate decisions.

Over the rest of 2024, our base case is for the ECB to pause in July before cutting rates again in September, October and December. However, we suspect ECB policymakers would prefer to see a return to an overall downward trend in wage growth and domestic inflation to be fully comfortable in lowering interest rates further, and thus view the risks as tilted toward lesser easing.

Source: Wells Fargo

The 6 June interest rate reduction was signalled ahead of time by ECB policymakers and widely forecast, including by ourselves. By the fourth quarter, we expect Eurozone wage growth and underlying inflation may have slowed sufficiently for the ECB to deliver further rate cuts at its October and December meetings, especially if the US Federal Reserve begins lowering interest rates as well. If realised, that would see the ECB’s deposit rate lowered by a cumulative 100 basis points this year to end 2024 at 3.00%.