Towards an interest rate cut in Europe this week? The ECB is preparing

Many of his colleagues expressed themselves along the same lines. According to experts, the size of the first rate cut after the hike cycle should be 25 basis points. This would lead the deposit rate to fall from 4%, the maximum reached last September, to 3.75%. If the decline is confirmed, the ECB will do so courtesy burns for the first time in its history at the US Fed in this domain.

Inflation is rising

Inflation began rising again in May in the euro zone, to 2.6% on a year after 2.4% in March and April, according to data released on Friday. This increase “is linked to temporary factors”, commented Riccardo Marcelli Fabiani, an analyst at Oxford Economics. As a result, “it will not prevent the decline in interest rates clearly announced in June. But the ECB will be cautious and is unlikely to lower interest rates (again) at its July meeting,” he said.

The bulk of the disinflation has taken place in the eurozone, since price increases of more than 10% peaked in October 2022. However, the ECB intends to see it fall further towards its 2% target. “The most interesting question” around the Governing Council table on Thursday will therefore be to know “to what extent the ECB will be willing to provide guidance” on its rates beyond June, says Dirk Schumacher, an economist at Natixis.

In this regard, within the ECB, differences have already emerged in recent days between the “doves”, supporters of a flexible monetary path, and the “hawks” followers of monetary orthodoxy. After June, a second consecutive rate cut in July is far from certain because “we are not on autopilot”, warned the “hawk” Joachim Nagel, president of the German Central Bank. François Villeroy de Galhau, governor of the Bank of France, called for “maximum optionality”, since the ECB must maintain its “freedom of times and rhythms”.

Projections

To fuel the discussion, the ECB will have a new set of economic projections. In March, the institute said it expected inflation to reach its 2% target in 2025. Since then, both GDP and inflation in the eurozone have surprised somewhat to the upside. But the new updated projections “should only show marginal changes, which in principle would allow for regular rate cuts,” believes Dirk Schumacher.

One recently commented indicator, negotiated salary growth, rebounded to 4.7% year-over-year in the first quarter, following 4.5% in the final quarter of 2023, thanks in particular to one-time bonus payments. “The ‘hawks’ will highlight the continued strong growth in wages which should invite caution” on rates, adds the economist.

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