ECB likely to lower interest rates as inflation eases

June 06, 2024 (MLN): The European Central Bank is poised to start lowering interest rates from record highs, confident that inflation is sufficiently contained to ease the burden on the economy, as Bloomberg reported.

After being held at a peak of 4% for nine months, analysts polled by Bloomberg almost unanimously predict that the deposit rate will be reduced by a quarter-point to 3.75% on Thursday — a step ECB officials have widely telegraphed in recent weeks.

Despite a bumpier retreat in price growth toward the 2% goal, President Christine Lagarde declared in May that inflation in the 20-nation euro zone is “under control” following its historic spike.

That’s put the ECB on course to loosen monetary policy before either the Federal Reserve or the Bank of England, where the problem is proving more stubborn.

Where the ECB goes from here is unclear, with views becoming more cautious in the wake of data showing stronger-than-anticipated economic growth, inflation and wage increases.

While most economists reckon there’ll be three rate cuts this year, investors have pared back their expectations and are only fully pricing two.

Lagarde will discuss the situation at a 2:45 p.m. briefing in Frankfurt — 30 minutes after the ECB’s policy announcement.

Interest Rates

Officials have fueled long-standing expectations of this week’s 25 basis-point cut. Even hawkish Governing Council members like Bundesbank President Joachim Nagel and Executive Board member Isabel Schnabel have maintained that there are sufficient grounds for such a move.

That level of commitment has raised some eyebrows following the recent batch of economic reports.

“If they were consistent with their reaction function, they should actually be holding this week,” said Soeren Radde, an economist at Point72. “Which tells you that it’s a political compromise they came up with.”

Anatoli Annenkov, an economist at Societe Generale, called the latest data “not unambiguously supportive of policy easing, leaving a question mark as to why policymakers have been so focused on June, already since early this year.”

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