Source: AFP
Buoyed by falling inflation, the European Central Bank is expected to keep borrowing costs on hold for the last time on Thursday, setting the stage for a first rate cut in June.
The Frankfurt-based institution left its key interest rates unchanged from October 2023, following an unprecedented run of hikes to tame red-hot inflation.
ECB President Christine Lagarde said after last month’s meeting that board members did not yet have “enough confidence” in inflation to consider easing the reins.
Rate cuts have strengthened since then, with euro zone inflation slowing more than expected in March to 2.4 percent – bringing the ECB’s 2 percent target within reach.
However, a change of course as early as this week looks highly unlikely, after ECB officials have repeatedly said they expect data that will not be available until their June 6 meeting.
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“We will know a little more by April and a lot more by June,” Lagarde reiterated in late March, referring in particular to data on euro zone wage growth.
In June, the ECB will also have its own updated forecasts for inflation and economic growth.
As such, Thursday’s ECB meeting “looks like the prelude to another turning point for monetary policy in the eurozone: final stop before the haircut,” said ING bank economist Carsten Brzeski.
Staggering economy
The ECB’s benchmark deposit rate is currently at a record 4%, following an aggressive hiking campaign to rein in consumer prices driven higher by Russia’s war in Ukraine and supply disruptions related to the pandemic.
Eurozone inflation, which peaked at more than 10 percent at the end of 2022, has been falling steadily in recent months and is now expected by the ECB to return to the target in 2025.
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However, higher borrowing costs have weighed on the eurozone economy, curbing demand as households and businesses feel the squeeze from more expensive loans and mortgages.
The 20-nation currency club narrowly avoided recession in the second half of 2023, weighed down by poor performance in its biggest economy, Germany.
Like other central banks, the ECB is now gauging the best time to shift gears and support economic growth through lower interest rates — without jeopardizing progress on inflation.
The Swiss National Bank kicked off its rate-cutting cycle last month when it cut its key interest rate by 0.25 percentage points – becoming the first major central bank to do so.
The US Federal Reserve, which started hiking earlier than the ECB and has held interest rates steady in recent meetings, is expected to remain tight for a while longer in the face of a robust economy.
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Cutting rates too soon could be “quite disruptive,” says Fed’s Powell
In front of the Fed
Fed Chairman Jerome Powell said last week that the high benchmark rate was “doing its job” against rising inflation, warning that cutting it too briefly could be “quite disruptive” to the US economy.
The prospect of the ECB cutting interest rates ahead of the Fed has some observers worried.
Lower interest rates in the euro zone could prompt investors to look elsewhere for higher returns, weakening the euro and making imports more expensive — possibly reigniting inflation.
However, Jack Allen-Reynolds of Capital Economics said he believed the ECB “will not wait for the Fed”.
“The two central banks will respond to different data. Right now, the evidence clearly supports an earlier cut by the ECB because economic growth is much weaker in the eurozone,” he said.
Once the ECB begins to ease monetary policy, attention will quickly turn to the pace and size of future rate cuts.
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Many observers are making at least three to four cuts this year, by 25 basis points each time.
However, Lagarde said the ECB would not “pre-commit to a specific rate path”, stressing that future decisions would depend on incoming data.
Source: AFP