The European Central Bank (ECB) cut interest rates by 0.25 points at its June meeting, as analysts expected.
He BCE reduced his main type of refinancing 4,25%the marginal credit rate at 4.50% and the deposit rate at 3.75%, as its political leaders had widely noted in recent weeks.
This represents the first cut since March 2016 for both the main rate of refinancing operations and the marginal credit rate, while, for the deposit typeis the first reduction since September 2019.
Why has the ECB cut interest rates?
The overall increase of 4.5 points applied by Frankfurt between July 2022 and September 2023 has contributed to reduce the general inflation rate from euro zone from a maximum of 10.6% in October 2022 to 2.6% in May 2024.
President Christine Lagarde indicated in March that there would be more clarity and sufficient data in June. It seems that that moment has arrived. Although the inflation has not yet fully reached the 2% target, its substantial decrease points out a downward trend which is expected to persist in the coming months.
According to the ECB’s latest projections from March 2024, the average inflation rate is expected to decline to 2% in 2025 y al 1.9% in 2026. Regarding core inflation, which excludes energy and food prices, projections place it at 2.1% for 2025 and 2.0% for 2026.
The 0.25 point cut will also continue to keep real interest rates positive, as nominal rates will remain above the current inflation rate. Thus, it indicates a reduction in the degree of tightening of monetary policy, rather than a broader normalization.
The rise in prices and the rise in the cost of loans have caused a slowdown in the bloc’s economic growth, containing demand to curb price pressures.
Although the euro zone economy grew by 0.3% in the first quarter of 2024, the previous two quarters were characterized by contractions of 0.1%. The second quarter of 2023 recorded slight growth of 0.1%, and the first quarter of 2023 and the last quarter of 2022, stagnation.
Will the ECB continue to lower rates after June?
Recent statements from ECB officials suggest that there will be no prior commitment to further cuts afterwards.
This means that a further rate cut in July remains uncertain as the ECB aims to remain flexible in its decisions and continue to monitor economic data.
Eurozone inflation rose to 2.6% in May, above the 2.5% forecast, while core inflation rose to 2.9% from 2.7% in April.
We hope that President Lagarde will signal once again that more information will be available in July to guide the next decision, with even more clarity expected in September.
The new June economic projections could suggest a slight upward adjustment to economic growth and inflation for 2024, while keeping the 2% inflation forecast for 2025 unchanged.
What are the risks of over- or under-cutting rates?
The ECB faces the challenge of balancing the risks of overcutting rates with those of undercutting.
If Frankfurt eases monetary policy too quickly and significantly, it would likely boost consumer demand and investment. However, it would also risk reigniting inflationary pressures before the 2% target is fully achieved.
The ECB would be exposed to uncertainties related to energy prices and geopolitical tensions with reduced buffers, which could have unintended effects on price dynamics.
Furthermore, although President Christine Lagarde stressed that the ECB “depends on data and not the Fed”, the divergence between the policies of the world’s two main central banks could have significant financial repercussions, especially on exchange rates.
An aggressive rate cut by the ECB while the Fed maintains higher interest rates for longer would put strong downward pressure on the euro against the dollar, with the risk of further upward pressure on stock prices. imported goods and services.
ADVERTISINGConversely, if Frankfurt maintains a tight monetary policy for too long and cuts rates less than the market currently expects, it risks stifling euro zone economic growth and widening the gap with the United States.
