ECB prepares for first rate cut in eight years

The European Central Bank (ECB) will hold a monetary policy meeting this week. The market assumes that the agency will cut rates for the first time in eight years. Moreover, some council members have already stated this in public speeches, and even Pablo Hernandez de Cos, governor of the Bank of Spain, takes it for granted. This would be a move that would pre-empt the US Federal Reserve, and would come with inflation above its 2% target, although it is close to that level at 2.6%.

Analysts expect this drop to be 25 basis points. Thus, interest rates will be at 4.25%, the same level as in August 2023. The last meeting at which the ECB raised the price of money was in September, when it placed it at the current level of 4.5%. Following this move, the single oversight body kept rates unchanged for five consecutive meetings. And in the sixth the expected fall will occur.

But what consequences will this have? The first was already seen on Tuesday in the Ibex 35 index. Spanish banks fell sharply in the selectivity, by an average of 4%, given the already more than discounted decision of the ECB. The banking sector is the sector that benefited the most from the rate hike as it increased margins and made larger profits. In fact, all banks recorded record quarterly and annual results during these nearly two years of rate hikes. For this reason, the market believes that rate cuts may impact corporate accounts.

However, banks recognize that the high rates that drive these peaks will not be sustained over time, but they want to avoid the recurrence of negative rates at zero. “It was truly extraordinary,” several directors and executives of the largest Spanish banks repeatedly noted. There is still no certainty as to what the drop will be from this Thursday, whether it will last over time or be specific, but Banks place rates at 2.5%-3%.

And the fact is that banks do not benefit in their trajectory from excessively high rates, since it harms the demand for credit. The range they consider favorable will allow them to maintain margins and renew demand for loans. Additionally, with this percentage, families may also have an advantage because deposits, that is, your savings, can continue to earn rewards.

Another impact of lower rates is that mortgages and loans will become cheaper, so we may see growth in these products, which have been declining in recent months. In fact, the latest data from the National Institute of Statistics (INE) for March shows that The number of home mortgages fell by 18.1%. compared to the same month in 2023 for a total of 29,653 loans.

Rumors of a rate cut are already having an impact on Euribor. The index closed May with a second consecutive year-on-year fall, which is leading to cheaper mortgage loans, and we are even starting to see a mortgage “war” between businesses.

There appears to be consensus in the market that the ECB is not going to cut rates as quickly as originally expected. So they forecast a decline of 25 basis points each quarter next year. Stephen Bell, chief economist at EMEA-Columbia Threadneedle, explains that the focus will be on what it says rather than just the downturn. Christine Lagarde

ECB President at his press conference. For his part, Martin Wolburg, senior economist at Generali AM, part of the Generali Investments ecosystem, believes that this is the beginning of an easing cycle and believes that markets are not sufficiently pricing in the scale of future rate cuts.

Another reason the market is wary of a stronger decline is that the Fed has not yet taken any action. Supriya Menon, multi-asset strategist at Wellington Management, explains that for some time “We foresee desynchronized cycles of interest rate cuts between the ECB and the Federal Reserve.” While the US economy continues to grow at a good pace, economic growth in Europe is slowly recovering from near-recession levels. Inflation is falling in Europe but remains stubbornly high in the United States. As a result, the ECB is likely to cut rates before the Federal Reserve. “Investors have prepared for this change by going long European rates and short U.S. rates, but we believe this has already been factored in,” he says.

For their part, BlackRock analysts note that “this is not a classic rate cut cycle.” As they explain, the ECB will begin to ease monetary policy before the Fed, but, in their opinion, the gap in the monetary policies of both banks will be temporary, even if a rate hike by the US central bank cannot be ruled out. . Central banks are considering rate cuts at a time when inflation remains above 2% and economic growth is strong or improving. “We expect them to keep rates high even longer,” he says.

Finally, Cristina Gavin, head of fixed income and fund manager at Ibercaja Gestión, explains that the key is not this week’s rate cut, but rather What will be the course of action of the European Central Bank at the next meetings?

. The fact that the Federal Reserve is also delaying rate cuts driven by price pressures, while not a determining factor, “may also shape the sentiment of ECB members when it comes to additional cuts.”

In this scenario, “we believe that the European authority will be prudent in its actions in the second half of the year, and we assume only two additional cuts before the end of the year,” which would leave the intervention level at 3.75% at the end of 2024 and the deposit rate at 3.25%.