ECB To Cut Rates For First Time Since 2019

The European Central Bank will cut interest rates by 25 basis points on Thursday.
ECB President Christine Lagarde is likely to take a data-dependent stance on the outlook for future interest rates.
The fate of the euro depends on the latest ECB forecasts and Lagarde’s speech.
The European Central Bank (ECB) will announce its first interest rate cut since 2019 at 12:15 GMT on Thursday.

The latest staff economic forecasts will be released at the same time as the interest rate announcement. A press conference by ECB President Christine Lagarde will be held at 12:45 GMT.

What to expect from the ECB rate decision?

After the June monetary policy meeting of the ECB Governing Council, a 25 basis point (bps) cut in the benchmark deposit facility rate has been fully confirmed, which will reduce borrowing costs from a record high of 4.0% to 3.75%.

Several ECB policymakers have already committed to a rate cut in June. Therefore, the main focus will be on the central bank’s communication on the future interest rate path. Market participants will be closely watching the wording in the policy statement and the speech of ECB President Christine Lagarde at the press conference to judge the scope and timing of the next rate cut this year.

Although the eurozone inflation rate is close to the central bank’s 2.0% target, the continued rise in service inflation (the annual inflation rate returned to above 4.0% in May) has raised expectations that the ECB will not start an aggressive easing cycle. Meanwhile, the annual eurozone inflation rate rose from 2.4% in April to 2.6% in May, higher than the expected increase of 2.5%.

In addition, the strong economic recovery and tight labor market in the Old Continent may force the ECB to avoid committing to further rate cuts at its meetings after June.

Therefore, Lagarde is likely to stick to the ECB’s data-dependent stance and avoid providing any guidance on the policy outlook.

“I think they will be much less prescriptive about their next moves than they were at the June meeting,” Paul Hollingsworth, chief European economist at BNP Paribas, said in a research note.

Markets are pricing in less than 60 basis points of rate cuts this year, which would imply two cuts and a less than 50% chance of a third. That’s down from the three cuts the ECB expected when it last met in April, and down from a January forecast of at least five cuts by 2024, according to Reuters.

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