Source: Wall Street See
The European Central Bank cut interest rates by 25 basis points as expected, following the Federal Reserve's lead. However, they did not provide any guidance on their next steps.
On Thursday, June 6th, the European Central Bank announced its June interest rate decision, cutting interest rates by 25 basis points as expected. This is the first time since 2019 and the second G7 central bank to cut interest rates after the Bank of Canada launched the first shot in the G7 countries last night.
Specifically:
The euro area deposit facility rate is 3.75%, down from 4% previously, the first cut since September 2019. The euro area's main refinancing rate is 4.25%, down from 4.5% previously. The euro area's marginal lending rate is 4.5%, down from 4.75% previously. This is the first time since March 2016 that these rates have been cut.
It is worth mentioning that the European Central Bank has stated that it will not make any advance commitments to specific interest rate paths, meaning that it is unlikely to continue to lower interest rates in July. The European Central Bank also stated that the inflation outlook has "clearly improved," but at the same time raised its inflation expectations for 2024.
After the European Central Bank decision was announced, traders maintained expectations of rate cuts from the ECB. There may be a further rate cut of 40 basis points later this year.
The euro rose by about 20 points against the dollar and is now trading at 1.0883. German bond yields fell, with the yield on 10-year German Treasury notes rising slightly to 2.533%. European stocks fell slightly, with the DAX index's gain narrowing to 0.6% and the Euro Stoxx 50 index's gain narrowing to 0.6%.
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Do not make advance commitments to interest rate paths.
The European Central Bank stated that policy constraints should now be appropriately relaxed:
Based on the latest assessment of the inflation outlook, potential inflation dynamics, and the transmission of monetary policy, the degree of monetary policy constraints should now be relaxed after maintaining rates unchanged for nine months.
At the same time, the ECB emphasized that it will not make any advance commitments to specific interest rate paths:
The Management Committee will continue to follow a data-dependent and gradual approach to determine the appropriate level and duration of restrictions.
In addition, the European Central Bank reiterated its plan to reduce assets in the emergency pandemic purchase program (PEPP), which aims to reduce monthly purchases of €7.5 billion in the second quarter of 2024.
Raise GDP and inflation expectations for 2024.
As for inflation, the European Central Bank acknowledges:
Since the September 2023 meeting, the inflation rate has declined by more than 2.5%, and the inflation outlook has clearly improved;
Although there has been some improvement recently, domestic price pressures are still strong due to accelerating wage growth, and inflation is likely to remain above target levels in the long term next year.
Compared to the March forecast, the European Central Bank raised its overall and core inflation forecasts for 2024 and 2025.
Economic growth: The GDP growth rate is expected to be 0.9% in 2024 (compared to 0.6% in March), 1.4% in 2025 (compared to 1.5% in March), and 1.6% in 2026 (compared to 1.6% in March).
Inflation: The inflation rate is expected to be 2.5% in 2024 (compared to 2.3% in March), 2.2% in 2025 (compared to 2.0% in March), and 1.9% in 2026 (unchanged).
Inflation fluctuations cast a shadow over the future path.
At present, the future interest rate path has become the focus of the market, while inflation fluctuations have cast a layer of 'shadow' over the future interest rate cut.
Carsten Brzeski, chief economist at ING Bank, said the European Central Bank's interest rate cut cycle may have to stop shortly after it begins.
The ECB's interest rate cut on Thursday may have used up most of its room for manoeuvre. The move to cut interest rates by the eurozone central bank has received wide attention and expectations, but it does show confidence in taking action ahead of the US Federal Reserve. The ECB's interest rate cut does not seem to be a last resort, but only because it can. As inflation in the entire currency union becomes tricky, the room for manoeuvre for this interest rate cut is shrinking, and the ECB itself has raised its expectations for CPI growth this year, which will limit the space for further rate cuts.
London's chief G10 forex strategist Childe-Freeman believes:
In fact, the ECB's choice not to commit to a specific path and to raise inflation expectations for 2024-25 gives the impression of a hawkish stance, which helps the bullish view on the euro against the dollar.
Marchel Alexandrovich, an economist at Saltmarsh Economics, said:
The European Central Bank has taken action and followed its guidelines. They did not commit to further interest rate cuts, and July rate hikes are not on the table. The market's focus is whether they will find room to cut rates in September. The European Central Bank raised its inflation expectations, which is not surprising. The fact is that inflation is tricky, making it difficult for the ECB to believe that inflation will fall to target levels. The key point is that they have not committed to following a predetermined interest rate path.
Editor/ruby