Euribor | The ECB’s rate hike ends two years later, with a cut expected this Thursday and another at the end of the year.
The European Central Bank (ECB) will cut the cost of money this Thursday and end rate hikes that began in July 2022 to combat inflation that was choking the economy at the time due to the energy crisis caused by the war in Ukraine. In October of the same year, price growth peaked at 10.7%. According to the latest data for May, the consumer price index (CPI) was 2.6%.
Core inflation has seen the same downward trend: after peaking at 5.7% in March 2023, it fell to 2.9% in May last year. “Inflation expectations are anchored at levels close to the ECB’s target (5-year futures inflation of 2.3%), which is a good indicator of investor confidence in the ECB’s ability to comply with its mandate. The Council will pay greater attention to the inflation trajectory. inflation in line with the ECB’s price stability target and its level of confidence that inflation will remain at that level,” says Frank Dixmier, Global Investment Director for Revenue. Installed by Allianz Global Investors.
The ECB’s rate cut will also be the first since 2014. and the value of money will fall before the US Federal Reserve makes its move for the first time since early 2000. The difference between the economic situation in the US and the eurozone explains this movement. The institution’s governing board, chaired by Christine Lagarde, believes inflation is under control, while on the other side of the Atlantic, April inflation figures of 3.4%, published in mid-May, were slightly below expectations.
“The Fed is softening market expectations regarding the timing and extent of future rate cuts. Lots of central bankers talk about this problem, with a common thread: more than one piece of information to ensure that inflation is under control and that the monetary easing cycle could begin at the end of this year or early next,” comments Katherine Reichlin, head of research at Mirabaud Group.
Likewise, the dynamism of the US economy is more resilient than the resilience demonstrated by the economy of the Old Continent. “The output gap is likely negative in the eurozone., and the economy has not grown for most of the last two years (the opposite of the US). Credit growth is extremely weak, suggesting that ECB policy is limiting activity,” explains Rafael Olshina-Margis, international economist at J. Safra Sarasin Sustainable AM.
The ECB’s decision this Thursday will not be the last of the year, and the market now expects there will be another cut or two over the course of the year depending on what data becomes available on growth and inflation. If the Fed cuts rates, the ECB will fall behind as rate cuts continue. If the United States keeps the value of money stable, there is a risk that Inflation in Europe will rise again due to euro devaluation.
Moreover, in an election year in the United States, a potential victory by Donald Trump cannot be ruled out, which could reignite a trade war with China. “Trump’s penchant for launching a brutal trade war could reignite inflation. and a new rate increase. This could continue to be a campaign argument, used as a negotiating position, just as Trump failed to secure the presidential and congressional victories needed to make it happen. This scenario cannot be completely ruled out at this time and could ultimately impact the ECB’s ability to continue its rate-cutting cycle and the performance of the European stock market,” adds François Reynaud, manager at Edmond de Rothschild AM.
Relief for mortgage holders and stimulation of the stock market
What does this mean for the real economy? Lower interest rates mean lower financing costs for companies and less burden for those in debt. The market is already assuming that the ECB will reduce the cost of money this Thursday, as evidenced by the performance of the Euribor mortgage index in recent weeks or the good performance of European stock markets in the context of economic improvement. In October, Euribor reached its highest level in six years, reaching 4.16%. The forecast for lower rates led to the mortgage index closing at 3.68% in May.
The Ibex 35 rose 11.7% and the Euro Stoxx 50 rose 9.55%. The biggest victims in stock markets could be banks, which fell sharply on Tuesday after impressive gains this year. Banco Sabadell grew by 70.5%, Unicaja by 50.6%, Caixabank by 46.7%, Bankinter by 37%, Banco Santander by 28% and BBVA by 19.18%. “Uncertainty around the ECB’s roadmap is affecting banks. These institutions depend on interest rates continuing to remain relatively high in order to be able to broker the rate curve and increase their interest margins, so Rate cut rally in 2025 will directly impact your profits.” says Javier Cabrera, analyst at XTB.