- ECB interest rate cut next week ‘almost guaranteed’ after German CPI data
- Markets expect a rate cut of 50 to 75 basis points this year, but analysts warn of uncertainty
The European Central Bank is expected to make its first interest rate cut in June, despite signs that inflation has not yet been defeated.
A flash estimate published on Wednesday shows that German consumer price inflation stood at 2.4 percent on an annual basis in May, compared with 2.2 percent in April, due to higher services inflation.
But the all-important measure of core inflation, which excludes energy and food costs, remained stable at 3 percent this month, despite expectations of a slight increase.
And barring any major shocks from EU-wide inflation data due on Friday, analysts say the prospects of the ECB leapfrogging both the US Federal Reserve and the Bank of England with its first rate cut next week appear all but confirmed.
ECB President Christine Lagarde expects to pull the trigger for the first interest rate cut next week
UBS said: ‘The signals emerging from the ECB meeting on April 11 and the subsequent public comments from ECB officials were clear: the ECB is on course to cut interest rates by 25 basis points at the upcoming meeting on April 11 ( bps) to 3.75 percent. June the 6th.’
The bank expects the headline inflation rate in the EU for May to “temporarily rise” due to higher energy inflation, forecasting an annual inflation rate of 2.5 percent for this month.
It added: ‘(But) even disappointing inflation data for May…would not hold the ECB back.’
Felix Feather, economist at asset manager Abrdn, agreed that next week’s rate cut is “almost guaranteed.”
While markets are confident about next week’s rate cut, there is much less certainty about the ECB’s policy outlook for the rest of this year, amid concerns about persistent inflationary pressures and the potential impact of the decoupling with US policy.
Feather said: ‘The data on services inflation and wage growth remains too current for successive cuts in June and July, so this could be a ‘hawk-like cut’.
‘Interest rates are widely expected to rise, but this would have to be extremely large to put the ECB off course for a cut in June.
‘However, what happens to core services inflation will be crucial in setting expectations for the ECB’s trajectory beyond June. The recent strong growth in labor costs could mean that services inflation is rising, leaving the ECB on hold for a while after the initial cut.”
Eurozone inflation struggles to return to ECB target of 2%
Current market prices indicate that the ECB will cut its key interest rate by 25 basis points two or three times by the end of the year, bringing interest rates to between 3.25 and 3.5 percent.
Carsten Brzeski, global head of macro at ING, said: “It seems to be a matter of pace, not whether the ECB will lift more restrictiveness.
‘The risk of reflation has clearly increased…(while) the cyclical recovery in economic activity, structural labor shortages and upward pressure on wages could easily jeopardize the ECB’s own inflation projections.
The question of whether next week’s rate cut will fall into the ‘one is none’ or ‘one and done’ category will remain unanswered, but one thing is clear: a longer substantial rate cut cycle will only materialize if inflation quickly returns to 2 percent.
“Any sign of reflation as well as stronger economic activity would limit the ECB’s room for maneuver.”
The ECB and the BoE are expected to start cutting interest rates this summer