Frankfurt (Germany) (AFP) – The European Central Bank is expected to begin cutting interest rates by a record amount on Thursday, the first cut in nearly five years, but uncertainties about how far it will go amid volatile inflation.
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Following an unprecedented series of interest rate hikes in the euro zone since mid-2022 to tame soaring energy and food prices, inflation has been slowly falling towards the ECB's 2% target.
Interest rates have remained unchanged since October, but the central bank is almost certain to cut borrowing costs by 0.25 percentage point on Thursday, taking its key deposit rate to 3.75 percent.
This would be a much-needed boost to the struggling euro zone economy and the first interest rate cut since September 2019.
The move marks a departure from the ECB's stance with the US Federal Reserve, which has also been aggressive in raising interest rates but is expected to delay starting to cut rates due to stronger-than-expected data.
“It's almost certain that the ECB will cut rates – this move has been communicated to markets for some time,” said Frederic Ducrozet, chief economist at Pictet Wealth Management.
“The focus will now shift to what happens after June.”
The ECB's tightening campaign came after Russia's 2022 invasion of Ukraine and pandemic-related supply chain problems drove up inflation, leading the bank to raise interest rates 10 times in a row.
No rapid relief is expected
But Thursday's expected rate cut is unlikely to signal the start of a rapid easing cycle.
While consumer price inflation has slowed from a peak of more than 10% in late 2022 when Europe was hit by the energy shock, bringing inflation down to the ECB's target is proving difficult.
Data released last week showed inflation in the 20 countries that use the euro rose faster than expected to 2.6 percent year-on-year in May, up from a 2.4 percent increase in April.
The eurozone economy has also emerged from recession, expanding at a faster pace than expected in the first quarter, but still slower than the strong growth in the U.S. economy.
Investors will be watching to see whether European Central Bank President Christine Lagarde gives any guidance on the pace of future rate cuts in her post-meeting press conference.
The central bank is also due to publish its latest forecasts for growth and inflation on Thursday, which will influence interest rate setters' discussions about their next moves.
However, Berenberg Bank economist Holger Schmieding predicts that the ECB will offer little clarity about its outlook for monetary policy, and will continue to insist that it will respond according to the incoming data.
However, given the volatility of recent data, the ECB is seen as unlikely to cut rates further at its next meeting in July.
Instead, many analysts believe policymakers would prefer to cut rates at their biweekly meetings (or once a quarter, as the bank meets every six weeks) while also issuing regularly updated forecasts.
This view was reinforced by Dutch central bank governor Klaas Knot, a member of the ECB's interest rate-setting governing council, who recently said interest rates would be lowered gradually, mainly at quarterly meetings.
In the United States, better-than-expected economic data has reduced expectations of when the Federal Reserve will start to cut borrowing costs when it next meets in mid-June, raising speculation the ECB may also keep policy on hold.
However, euro zone interest rate setters have stressed that they will set their own policy.
But there are concerns that if the ECB cuts rates faster than the U.S. central bank, it could lead to a weaker euro, making imports into the euro zone more expensive and spurring inflation.
© 2024 AFP
