Kaitou Macro stated that the European Central Bank's interest rate reduction path will have to exceed most investors' expectations.
On Thursday, the European Central Bank lowered interest rates by 25 basis points as expected, bringing the deposit facility rate down by 25 basis points to 2.75%, in line with market expectations, marking the fourth consecutive meeting of a 25 basis point cut. The main refinancing rate and marginal lending rate were reduced from 3.15% and 3.40% to 2.90% and 3.15%, respectively.
The European Central Bank indicated that inflation remains largely in line with staff forecasts and will return to its 2% medium-term target within this year. The ECB did not commit to a specific rate path in advance but expressed determination to ensure that inflation stabilizes at the 2% medium-term target. The ECB will adopt a data-dependent approach and make decisions at successive meetings. The bank stated that the monetary policy remains tight, past rate hikes are still being transmitted, and are having an effect. The economy still faces challenges.
Following the publication of the European Central Bank's rate decision, the euro surged against the dollar without significant short-term fluctuations. Traders maintained their bets on a rate cut from the ECB, expecting a further reduction of 70 basis points this year. Monetary policy remains tight.
Later, at 21:45 Beijing time, Lagarde stated that the economy is expected to remain weak in the short term. Greater friction risks that may arise in global trade could put pressure on economic growth in the Eurozone. Tariffs might weaken the global economy. Manufacturing continues to contract, consumer confidence is weak, and the increase in real income has yet to convince consumers. Conditions for recovery still exist, and the labor market remains robust. If trade tensions do not escalate, exports should be able to support economic recovery. A strong job market and higher income should boost demand.
Lagarde stated that inflation will fluctuate around current levels in the short term. Inflation in the services sector remains high, and higher wages and profits increase the upside risk for inflation. The downside risks for inflation include low confidence and geopolitical pressures, while friction in global trade will make the inflation outlook more uncertain.
After the release of U.S. data and comments from ECB President Lagarde, the euro reversed its downward trend against the dollar, rebounding about 20 points in the short term, rising 0.1% for the day, reaching an intraday high of 1.0434; the USD dropped nearly 20 points in the short term.
Previously, the IMF believed that although there are concerns about global trade, inflation in the Eurozone is increasingly being brought under control.
Despite the latest round of surveys showing some signs of recovery, the economy in Europe remains weak, with inflation hovering above the European Central Bank's 2% target, which provides a reason for a rate cut on Thursday. "The anti-inflation process is back on track," the European Central Bank stated.
The European Central Bank added, "Domestic inflation remains high, mainly because wages and prices in certain industries are still adjusting to past inflation surges, although the adjustments have been significantly delayed. However, wage growth is slowing as expected, and profits have somewhat cushioned the impact on inflation."
Abrdn economist Felix Feather stated that the European Central Bank's statement seems to indicate that policymakers are increasingly confident about inflation returning to its target. Like last December, the European Central Bank pointed out that domestic inflation is still too high, but this time it also noted that strong wage growth is easing the upward pressure on domestic inflation. Abrdn expects the European Central Bank to cut rates three more times this year. He commented, "This view is based on weak growth prospects and our expectation that inflation will retreat to target levels and stay there."
Mathieu Savary stated: "We expect there will be two to three more interest rate cuts. Wage growth will fall to 2%, unit profits are weakening, and most importantly, the USA's trade policy remains a major drag on Europe's economic activity."
Although investors currently expect the European Central Bank to continue cutting rates by 25 basis points at upcoming meetings, until rates reach around 2%, Holger Schmieding, chief economist at Berenberg Bank, said that a potential trade war could change this, as imposing a 10% tariff on all goods imported from the Eurozone by the USA could cut Eurozone economic growth by up to 0.5 percentage points within a year, triggering larger rate cuts.
Sam Adams, an economist for the Eurozone at UBS Group Wealth Management, shares a similar view, stating, "Weak economic growth and inflation will prompt the central bank to lower the deposit rate to 1.5% later this year. If the economic outlook presents downside risks, such as potential trade conflicts with the USA under the new government, it may have to make more rate cuts than investors currently expect. On the other hand, despite widespread pessimism, the economic performance has been quite good so far."
Adams remarked, "The management committee will not rush to cut rates until it sees the data losing momentum. Given these tensions, our view is that they will take a middle path and cut rates three more times before June, at which point the deposit rate will reach 2%."
Jack Allen-Reynolds, deputy chief economist for the Eurozone at Capital Economics, stated, "The European Central Bank's decision today to lower the deposit rate from 3% to 2.75% is not surprising, and the accompanying statement indicates that, as widely expected, there will be more rate cuts. We believe that the European Central Bank's cuts will have to exceed most investors' expectations. Our view remains that weak economic growth and inflation will prompt the central bank to lower the deposit rate to 1.5% later this year."
Matthew Morgan, head of fixed income at Jupiter Asset Management, stated that just hours after the Federal Reserve kept interest rates unchanged, the European Central Bank lowered interest rates again, which first illustrates the divergence in Global monetary policy. He noted that different growth outlooks clearly justify this divergence. However, the widening interest rate gap, coupled with investor interest in American companies, highlights the excessive dependence of the global economy on the USA. The growth outlooks for Germany, France, and the United Kingdom remain weak, and political challenges mean it is difficult for Europe to see a turnaround in the short term.
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