ECB Cuts Interest Rates, Raises Inflation Forecast - 06 June 2024

The European Central Bank’s decision today to cut its deposit rate from 4.0% to 3.75% is hugely significant, as it marks the first rate cut since September 2019. The ECB had kept rates at a record high of 4.0% for four straight times, as it maintained a rate policy of “higher for longer” after its steep rate-tightening cycle.

ECB Revises Upwards its Inflation Forecast

The ECB statement noted that eurozone inflation has fallen significantly and that the inflation outlook had “improved markedly”. At the same time, inflation was likely to remain above the ECB’s inflation target well into 2025. The ECB raised its forecast for both headline and core inflation compared to the March projections. Inflation is expected to rise to 2.8% in 2024 and 2.2% in 2025.

Over the past several weeks, the ECB has signaled its intentions to lower rates at today’s meeting and the Euro is showing little movement in the aftermath of the decision. Eurozone inflation accelerated unexpectedly in May and there was some speculation that the ECB would delay a rate cut until July. Now that the rate cut is in the books, the key question is what happens next?

The statement stressed that the Governing Council is “not pre-committing to a particular rate path”. The ECB will want to monitor how today’s rate cut affects the economy, in particular, inflation. If inflation accelerates again in June, it would likely mean a delay in plans to follow up with additional interest rate cuts. Many ECB members have voiced concern about inflation rebounding if rates were cut too soon, and today’s cut can be viewed as a “trial balloon” which will be repeated only if the ECB is confident that inflation remains in check. 

Euro and European Stock Markets Edge Higher After ECB Decision

In the aftermath of the ECB rate decision, the Euro has recorded slight gains against the United States Dollar and the British Pound. EUR/USD rose as much as 0.30% earlier but the US dollar has recovered almost all these gains. Early in the North American session, EUR/USD is trading at 1.0875, up 0.06% and EUR/GBP is trading at 0.8515, up 0.18%.

In the eurozone, stock markets are showing modest gains. The German DAX is at 18,649.35, up 79.58 points (0.43%), and the French CAC 40 Index is at 8,026.16, up 19.59 points (0.24%).

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