A historic turnaround! The European Central Bank cut interest rates by 25 basis points for the first time in five years

Wall Street Sights

2024-06-06 20:49Posted on the official account of Shanghai Wall Street News

The ECB "rushed" the Fed, with a 25 basis point rate cut as scheduled, but did not explain its next move.

On Thursday, June 6, the European Central Bank announced its June interest rate decision, cutting interest rates by 25 basis points as expected, the first time since 2019, and the second central bank among the G7 member countries to cut interest rates.

Specifically:

The Eurozone Deposit Facility Rate was 3.75%, compared with 4% previously, the first reduction since September 2019; The main refinancing rate in the euro area was 4.25%, compared with 4.5% in the previous period; The marginal lending rate in the eurozone was 4.5% compared to 4.75% previously.

It is worth mentioning that the ECB said that it does not make pre-commitments to any specific interest rate path, which means that consecutive rate cuts in July are unlikely. The ECB also said that the inflation outlook has "improved significantly", but at the same time raised its inflation forecast for 2024.

Following the ECB's decision, traders maintained expectations for a rate cut by another 40 basis points this year.

EUR/USD rose about 20 pips in the short term and is now at 1.0883. German bonds extended their decline, and the German 10-year government bond yield rose slightly in the short term and is now at 2.533%. European stocks edged lower in the short term, with Germany's DAX narrowing gains to 0.6% and the Euro Stoxx 50 narrowing gains to 0.6%.

No pre-commitment is made to the path of interest rates

The ECB said it was time to ease the degree of policy restrictions appropriately:

Based on the latest assessment of the inflation outlook, underlying inflation dynamics, and the strength of monetary policy transmission, the extent to which monetary policy restrictions should now be eased after keeping interest rates unchanged for 9 months.

At the same time, the ECB stressed that it does not make pre-commitments to any particular path of interest rates:

The Management Committee will continue to follow a data-dependent and meeting-by-meeting approach to determine the appropriate level and duration of restrictions.

In addition, the ECB reiterated its plan to reduce PEPP in the second half of 2024, i.e., to reduce its holdings of PEPP assets by 7.5 billion euros per month in the second quarter.

Raise GDP and inflation forecasts for 2024

On inflation, the ECB acknowledged in its statement that:

Since the September 2023 meeting, inflation has fallen by more than 2.5 percentage points, and the inflation outlook has improved significantly;

Despite the recent improvements, domestic price pressures remain strong due to faster wage growth, and inflation is likely to remain above target for a long time next year.

The ECB raised its headline and core inflation forecasts for 2024 and 2025 compared to its March forecast.

Economic growth: GDP growth is expected to be 0.9% in 2024 (0.6% in March), 1.4% in 2025 (1.5% in March) and 1.6% in 2026 (1.6% in March).

Inflation: Inflation is expected to be 2.5% in 2024 (2.3% in March), 2.2% in 2025 (2.0% in March) and 1.9% in 2026 (unchanged).

Volatility in inflation casts a shadow over the path ahead

At present, the path of future interest rate cuts has become the focus of the market, and inflation volatility has cast a "shadow" on future interest rate cuts.

Carsten Brzeski, head of macroeconomics at ING Bank, said the ECB's rate-cutting cycle may have to be stopped soon after it begins.

The ECB's rate cut on Thursday may have used up much of its room to maneuver. The move of the eurozone central bank to cut interest rates has received widespread attention and expectations, but it does show confidence to act before the Fed. The ECB does not seem to cut rates out of necessity, but simply because it can. The room for maneuver for this rate cut is shrinking as inflation across the monetary union becomes tricky, and the ECB itself has raised its expectations for CPI rises this year, which will limit the room for further rate cuts.

Childe-Freeman, chief G10 FX strategist in London, believes:

The fact that the ECB chose not to commit to a specific path in advance and raised its inflation forecasts for 2024-25 gives the impression of hawkishness and contributes to the bullish view on EURUSD.

Saltmarsh Economics欧洲经济学家Marchel Alexandrovich表示：

The ECB took action and followed its guidance. They have not committed to further rate cuts, and a July rate hike is not on the table. The focus of the market is whether they will find room to cut interest rates in September. I am not surprised that the ECB raised its inflation forecast. Inflation has proven to be tricky, which makes it difficult for the ECB to believe that inflation will fall to target. The key statement is that they have not committed to following a predetermined path for interest rates.

Related Reading:

The Bank of Canada announced a 25 basis point interest rate cut for the "first cut" for G7 countries

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