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Against the backdrop of global economic changes, the European Central Bank (ECB) announced the first interest rate cut since 2019 in early June 2024, which not only marks a new shift in monetary policy in the eurozone, but also indicates that inflationary pressures are gradually easing, and the road to economic recovery seems to have paved the "sweet last mile". This article will delve into the story behind this major decision and its potential impact on the global economy from multiple dimensions, such as the background and impact of the ECB's interest rate cut, as well as the political and economic linkage effect of the French parliamentary election.
Storm of interest rate cuts: The ECB's first move in five years
Background: Since July 2022, the European Central Bank (ECB) has raised interest rates ten times in a row, with a cumulative increase of 450 basis points, in response to high inflation triggered by the Russia-Ukraine conflict and the post-pandemic economic reopening. However, as international energy prices stabilize and global supply chains gradually recover, inflation in the eurozone has fallen significantly, from 4.3% in September 2023 to 2.6% in May 2024. Against this backdrop, the ECB's decision on June 6 to cut the three key interest rates by 25 basis points and the deposit rate to 3.75% came earlier than the market expected.
Economic considerations: Behind the rate cuts is the ECB's deliberate efforts to slow economic growth and easing inflationary pressures. Interest rate cuts aim to reduce the cost of financing for businesses and consumers, stimulate investment and consumption, and in turn drive economic growth. IMF economists Domenico Giannone and Giorgio Primiceri pointed out that through model analysis, inflation in the eurozone is gradually approaching the 2% target, and the ECB is expected to usher in an "easy last mile" without a new shock.
The Dawn of Economic Recovery: The Eurozone Outlook
Growth forecast raised: The European Central Bank (ECB) raised its forecast for the eurozone's economic growth for this year and next in line with interest rate cuts. GDP growth forecast for 2024 has been raised from 0.6% to 0.9%, and from 1.5% to 1.4% in 2025. This adjustment reflects the ECB's increased confidence in the economic recovery of the eurozone. George Buckley, chief European economist at Nomura, pointed out that inflation in the eurozone has cooled significantly, the labor market continues to be strong, and business surveys also show that the economy is gradually recovering.
Labor Market and Business Vitality: The solid performance of the labor market in the eurozone is an important support for the economic recovery. Despite the challenges of the global economic slowdown, unemployment in the eurozone remains low and wages continue to grow, providing a strong guarantee for corporate earnings. At the same time, enterprises' expectations for the future economic prospects have also tended to be optimistic, and their willingness to invest has increased, injecting new impetus into economic growth.
French parliamentary re-election: a double game of political economy
The rise of the right: At a time when the eurozone economy is showing signs of recovery, France's political landscape is undergoing a dramatic shift. In the European Parliament elections in early June, the far-right National Alliance won 31.7% of the vote in France, leading the ruling Baath Party by a wide margin. Subsequently, French President Emmanuel Macron announced the dissolution of the National Assembly and the early holding of new elections, with the first round of voting scheduled for June 30 and the second round for July 7.
Political-economic linkage: The National League took an anti-immigrant stance, promising to cut electricity prices, gas value-added tax, and expand public spending. While popular with voters, these policy proposals could put enormous pressure on France's finances. Analysts point out that if the National Alliance gains an advantage in the parliamentary elections, France could face the risk of long-term political instability and a surge in the fiscal budget, which in turn will adversely affect economic fundamentals.
Market reaction and uncertainty: The outcome of the French parliamentary election will not only affect the direction of French domestic politics, but will also have a profound impact on the eurozone and the global economy. There are widespread concerns that the rise of extremist political parties could exacerbate policy uncertainty and affect investor confidence. However, some analysts believe that short-term political changes are not enough to change the general trend of improving economic fundamentals, and the development of Europe is still worth looking forward to.
The European Central Bank cuts interest rates from a global perspective
Divergence of global monetary policy: Among the world's major central banks, the European Central Bank (ECB) has cut interest rates ahead of the Fed and the Bank of England. This move not only reflects the unique state of affairs of the eurozone economy, but also heralds the intensification of the divergence of global monetary policy. Central banks such as Switzerland, Sweden, the Czech Republic and Hungary have cut interest rates this year, and the Bank of Canada has joined the bandwagon. In contrast, the US economy is growing strongly, the Fed is unlikely to cut interest rates in the near future, and the Bank of Japan is likely to remain accommodative.
Impact on the global economy: The ECB's rate cut could trigger a depreciation of the euro, which is positive for exporters, but could also push inflation higher. As a global reserve currency, the trend of the US dollar has an important impact on the global economy and financial markets. After the European Central Bank cut interest rates, the dollar may enter an upward cycle, increasing global trade frictions and geopolitical risks. In addition, reduced global liquidity could also put pressure on asset prices.
Conclusion: Look for opportunities in challenges
The ECB's interest rate cut is an important step in the adjustment of monetary policy in the eurozone, marking the easing of inflationary pressures and the dawn of economic recovery. However, in the face of complex changes in the global political and economic landscape, the eurozone and the global economy still need to remain vigilant and flexibly respond to various uncertainties. For investors, paying close attention to changes in the global political and economic situation and adjusting investment strategies in a timely manner will be the key to grasp future opportunities. In this "sweet race", let's wait and see whether the eurozone can successfully cross the finish line.