The European Central Bank (ECB) is likely to embark in June on a gradual path of interest rate cuts. Rates are presently at a record 4% but are anticipated to be reduced progressively to around 2.25% by late 2025.
The Euro Area economy stagnated in the fourth quarter of 2023, following a 0.1% contraction in the previous three-month period, as persistently high inflation, record borrowing costs, and weak demand for its exports continued downward pressure on growth. Household consumption rose by a meagre 0.1%, following a 0.3% increase in the previous quarter. Looking at the full year of 2023, the GDP grew by just 0.4%, marking a sharp decline from a 3.4% expansion in 2022.
Source: Trading Economics
Will the ECB cut before the Fed?
Inflation is falling faster than forecast in Europe while exceeding expectations in the US, prompting investors to predict the ECB could cut interest rates earlier than the US Federal Reserve (Fed).
Eurozone inflation dropped to 2.4% in the year to March, the fourth straight monthly fall and the latest evidence that prices are edging close to the ECB’s 2% target.
In contrast, US inflation has exceeded forecasts since the start of this year, with the headline personal consumption expenditure metric that the Fed uses for its target rising from 2.4% in the year to January to 2.5% in February.
After the biggest rise in the cost of living for a generation, the diverging paths of inflation in the Eurozone and the US have prompted investors to reduce the total interest rate cuts they expect from the Fed this year while predicting the ECB will still ease policy aggressively. Disinflation momentum remains stronger in Europe than in the US.
What are the risks?
Bloomberg published an interesting survey examining the risks that economists see facing the Eurozone economy. The risks were assessed from 1 (no risk) to 5 (significant risk) as shown below, with geopolitical tensions being the most serious risk faced, followed by the uncertainty created by the US elections in November.
Source: Bloomberg
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