For the first time in 5 years! The ECB is going to cut interest rates, and then what?

Golden Ten New Media

2024-06-06 10:17Published in Guangdong

There's an even bigger mystery ahead! There are five key questions facing the market.

The European Central Bank is set to cut interest rates for the first time since 2019 on Thursday, but what will happen after that is a bigger mystery.

Eurozone inflation is close to the ECB's 2% target, but May inflation data beat expectations and the dominant services sector remains elevated. At the same time, the region's economy is recovering faster than expected and the job market remains tight, creating uncertainty about the number of rate cuts the ECB will take this year.

Jens Eisenschmidt, chief European economist at Morgan Stanley, said: "The rate cut itself is not big news. The question is: what will happen in the future? "He served at the European Central Bank.

Here are five key questions facing the market:

1. Will the ECB cut interest rates this week?

Most likely, because many policymakers have almost all but promised a rate cut in June.

The ECB is expected to cut interest rates by 25 basis points, bringing its deposit rate to 3.75% from a record high of 4% in September last year.

The ECB will almost certainly cut interest rates for the first time since 2019

2. What will be the path of interest rates after June?

This is uncertain.

Markets are now pricing in less than 60 basis points of rate cuts by the ECB this year, i.e. two cuts, with less than a 50% chance of a third, a sharp pullback from at least five expected at the start of the year.

Many forecasters still expect the ECB to cut interest rates three times in June, September and December, with the latest economic forecasts to be released after these meetings.

The hawkish camp of the ECB is trying to cancel the planned rate hike in July. Others, such as the head of the Bank of France, Villeroy, do not want to close the door to rate hikes.

So don't expect much guidance from ECB President Christine Lagarde on Thursday. Analysts believe that she will repeat the central bank's "data-dependent" slogan.

Paul Hollingsworth, chief European economist at BNP Paribas, said: "I think they are going to plan far less about what they do next than they did in June. ”

Traders cut bets on the ECB's interest rate cuts

3. How much trouble does the accelerating wage growth cause the ECB?

Economists believe that the impact will not be significant.

Policymakers would like to see more evidence of a slowdown in wage growth before cutting interest rates, but May data showed that wage growth picked up to 4.69% in the first quarter. But the situation in Germany distorts this data, and wage growth in the country is still catching up with inflation.

The ECB is believed to have signaled that it is not worried. The central bank published a blog post on the same day, highlighting that other wage indicators show that pressures are slowing. Even the representative of the hawks, Bundesbank President Nagel, was dismissive of these data.

However, services inflation, which reflects domestic demand, rebounded in May, while record-low unemployment may also bring uncertainty to the extent of wage cooling.

Morgan Stanley's Eisenschmidt said the wage data "gives [policymakers] more reason to gradually lower interest rates because they have to wait to get more confirmation to ensure that inflation eventually reaches 2%".

Wage growth, which is key to the ECB's interest rate cut prospects, accelerated in the first quarter

4. What about the economic growth of the eurozone?

It doesn't seem like a cause for concern either.

The eurozone economy grew by 0.3% in the first quarter, higher than expectations of 0.2%. Forward-looking business activity data also came in higher than expected, suggesting a strong recovery.

Economists believe that these data are good news for the ECB. A pickup in economic activity could help improve weak productivity growth, in part due to labor hoarding, thereby boosting confidence that inflation is slowing. And the economic growth data is not enough to raise concerns that demand will reinvigorate inflation.

Reinhard Cluse, chief European economist at UBS, said: "The latest economic data is encouraging. It refutes the notion of outspoken doves who say the economy is in trouble and we must cut rates quickly. ”

The eurozone's economic recovery so far this year has exceeded expectations

5. What will the ECB's new projections show?

Analysts expect the ECB to slightly raise its growth and inflation forecasts, but this should not affect its expectations that inflation will return to target by the end of 2025.

Konstantin Veit, portfolio manager at PIMCO, said: "The overall picture should be in line with March. ”

Analysts expect the ECB to slightly raise its growth and inflation forecasts

Risk Warning and Disclaimer: The market is risky, and investors should be cautious. This article does not constitute personal investment advice and does not take into account the particular investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, opinions, or conclusions contained herein are consistent with their particular circumstances. Invest accordingly at your own risk

View original image 579K

• 

• 

• 

• 

•