ECB Set to Cut Rates Despite Inflation Uptick

Eurozone's key interest rate is forecast to fall to 4.25%, but July's meeting is considered less of a done deal

Antje Schiffler 3 June, 2024 | 3:10PM
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ECB building at night

The European Central Bank is expected to announce its first interest rate cut in eight years on Thursday.

The eurozone's key interest rate is forecast to fall by 0.25 percentage points to 4.25%, a cut that follows the Swiss National Bank and the Swedish Riksbank in March and May, respectively. If the ECB cuts interest rates, the central bank will have moved ahead of the Bank of England and Federal Reserve, which both hold meetings in June.

In total, markets currently price in less than 0.60 percentage points in cuts in 2024, meaning two moves with the possibility of a third. This is down from April, when markets anticipated three rate cuts, and from January, when at least five cuts were on the table, according to Reuters.  

The cut on June 6 seems a done deal but any other outcome will shock the markets on Thursday, says Michael Field, European market strategist at Morningstar.   

Eurozone Inflation Ticks Up

The anticipated cut comes despite the recent flare-up in eurozone consumer prices. Inflation had fallen close to the bank’s 2% target, but both headline and core inflation numbers for May came in above expectations, marking the first month-on-month acceleration of 2024.  

Eurozone inflation rose to 2.6% year on year, from 2.4% in April, Eurostat said on May 31. Core inflation, which shows prices without energy and food costs, also accelerated to 2.9%, from 2.7% in April. 

Will the ECB Cut Rates Again in July?

Thursday’s rate announcement will be closely watched for any signs of what happens beyond June, with markets now looking ahead to the July 18 meeting.  

“It is understandable that the bank does not want to rush into mass rate cuts and potentially have to reverse course if inflation rises much further," says Field.

"Whether more rate cuts follow this year, or early next year, will likely not move the needle either way. The ECB has indicated its desire to reduce rates, so while the timing of rate cuts is not yet 100% clear, the direction of travel is at least.”  

Konstantin Veit, portfolio manager at Pimco, doubts the ECB will give much guidance on Thursday, and expects that the council to reaffirm its meeting-by-meeting approach and reliance on the data.

“We therefore believe it is unlikely that the ECB will commit to a specific interest rate path”, he says. However, Pimco expects a cautious approach, with 0.25 percentage point moves.

Marco Wagner of Commerzbank Economic Research said in a May 31 note: “There is certainly a risk that the numerically superior doves in the ECB Governing Council will seize the opportunity and push for a second interest rate cut in July. If the inflation figures in May and June turn out to be low, this would not be out of the question.

Monetary Policy to Remain Restrictive

"The doves could argue that, despite a first rate cut in June, real interest rates are unlikely to fall in view of the downward trend in inflation and that monetary policy will therefore remain restrictive. However, some governing council members, such as Estonian Madis Müller, have now explicitly spoken out against a rapid further rate cut in July," Wagner added.

"Other members ... such as Spain's Pablo Hernández de Cos ... have spoken of proceeding with caution after the June move. We therefore still do not expect a rate cut in July.”

According to economists at Swiss bank J. Safra Sarasin: “The market prices in a slow pace of about 1.5 [percentage points] in cuts for the rest of the year. This is not much, in our view. Inflation is trending down and economic growth remains sluggish following two years of stagnation. Policy is clearly restrictive and the ECB can afford to be a bit bolder.”

They continue to expect the cut to be followed by three more this year.  “This is not much, in our view. Inflation is trending down and economic growth remains sluggish following two years of stagnation. Policy is clearly restrictive and the ECB can afford to be a bit bolder”, a May 29 note by the analysts saod.  


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Antje Schiffler  is an editor for Morningstar in Frankfurt.

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