The European Central Bank (ECB) plans to lower borrowing costs for the euro area for the first time since September 2019. This move will conclude the rapid rate-hiking cycle initiated after the Covid-19 pandemic due to soaring inflation. However, investors are now focused on what will follow this June cut.
ECB officials have indicated strong support for the rate cut on June 6. Mark Wall, an ECB analyst at Deutsche Bank, mentioned that despite higher-than-expected inflation in May, the ECB believes a rate cut aligns with its policies.
In May, euro area inflation slightly exceeded expectations, with headline inflation at 2.6% and core inflation at 2.9%. Negotiated wage growth also increased to 4.7% in the first quarter of 2024. Holger Schmieding, Berenberg’s chief economist, noted that these figures are influenced by temporary factors like mild winter weather and one-off payments in Germany.
While another rate cut in July is possible, it seems unlikely given recent ECB comments. ECB board member Isabel Schnabel cautioned against cutting rates too quickly, highlighting persistent domestic inflation, especially in services.
A potential divergence between ECB and U.S. Federal Reserve policies could impact the euro-dollar exchange rate, influencing inflation through import prices. Mark Wall warned that a significant difference in policy rates could lead to higher inflation if domestic demand remains strong and profit margins narrow.