The ECB will finally cut rates today: what else to expect from Lagarde’s speech | Economy

In the codes studied, which guide the actions of central banks allergic to surprises and plot twists, the most unpredictable and revolutionary thing would be if the ECB did not cut interest rates today. In Frankfurt, the stage is set for the institution’s Governing Council to decide to lower the price of money in the eurozone, which will finally give companies and households some respite after the sudden increase in rates to 4.5%, the 2001 maximum… .

In the codes studied, which guide the actions of central banks allergic to surprises and plot twists, the most unpredictable and revolutionary thing would be if the ECB did not cut interest rates today. In Frankfurt, the stage is set for the institution’s Governing Council to decide to cut eurozone money prices, finally giving companies and households some respite after a sudden rate hike to 4.5%, the 2001 high. has been there unchanged since September last year, but the ECB believes it is time for a cut, its first in eight years, by 25 basis points.

The ECB has been talking about this reduction in recent months, and the biggest surprise today is that it has not done so. But he also cautioned that today’s decision need not be the start of a predictable path of lower value of money. We will have to decipher Lagarde’s speech today in detail to try to find out what will happen in the coming months to the cost of borrowing for companies and households in the eurozone.

March of inflation

Price evolution is the principle that guides the ECB’s actions. This institution owes its mandate to achieving price stability with a Eurozone inflation rate of 2%, which is not punctual but uniform and stable. Inflation has already dropped markedly from highs above 10% in the fall of 2022. In May this year, it was 2.6% year on year, which, however, turned out to be higher than expected and exceeded two tenths compared to the previous year. last month. The 2% target is still being resisted, and there are signs in the services sector that inflation may not be completely beaten.

Prices in the service sector again turned out to be the most inflationary: in May they rose by 4.1% after 3.7% in April. And wages, an indicator the ECB monitors closely, accelerated in the first quarter, rising 4.7% from 4.5% in the previous quarter. The central bank does believe that what remains of inflation pressures, including pressure on wages, will dissipate over the course of 2024, but it is expected to exercise caution before moving forward with further interest rate cuts.

Ruben Segura-Cajuela, Bank of America’s chief European economist, says the ECB is moving, but slowly. In addition to expecting a 25 basis point rate cut at today’s meeting, the US bank foresees “small changes to the ECB’s guidance in the press release, largely acknowledging the first step, the dependence on data and the need to proceed with caution.” “It is likely that the press conference will show that there is no predetermined path.”

Next moves, in the air

Bank of America also expects Lagarde to argue that more information is needed in July to decide on the next step in September, the likely time for a second cut. In April, Lagarde already defended the importance of having more data to make a decision in June. The stage was then set for today’s decline, even though the most recent indicators – a higher-than-expected CPI for May and accelerating wage growth – did little to support the idea of ​​beating inflation. “This evolution of inflation calls into question future cuts. Based on wage and inflation forecasts, I believe we will experience additional deflation in the second half of 2024. This will allow the ECB to cut it by a total of three times this year. However, the risks are increasing as the ECB will only cut rates twice this year,” explains Tomasz Wieladek, chief economist at T. Rowe Price.

Analysts predict two to three rate cuts in the eurozone this year. Today the market is waiting for new signals about the impending rate cut, but the latest inflation data suggests that the ECB will not want to follow a more or less specific path and will limit itself to its famous speech about holding meetings after meetings. Make a decision based on the data at the moment. Investors currently give only a 12% chance of a second rate cut in July, an option that has already been ruled out by ECB hardliners; the probability of contraction in September is 60%, and in December – 54%.

Update of macroeconomic forecasts

Whether these probabilities change after today’s meeting will also depend on developments in the revision of growth and inflation forecasts offered by the ECB each quarter. No major changes are expected from what was announced in March, when the central bank unveiled a significant adjustment to its inflation forecasts: the consumer price index will be 2.3% this year, up from 2.7% raised in December; 2% in 2025 and 1.9% in 2026. Its growth forecast for this year called for GDP growth of 0.6% in March, 1.5% in 2025 and 1.6% in 2026.

Bank of America sees the possibility of a slight upward revision in inflation in the short term, with no change in the medium term, reiterating the need to proceed with caution. Goldman Sachs points to a small one-tenth upward adjustment in the consumer price index this year and next, to 2.4% and 2.1%. As well as an upward adjustment to the growth forecast for this year to 0.7%. Not in vain, as inflation continues to decline, growth rates are also slightly better than expected. Eurozone GDP rose 0.3% in the first quarter, putting the region behind a technical recession after contracting 0.1% in the final two quarters of 2023.

“Recently released payroll data, which surprised with growth prospects, argues against a contraction in July, but weak credit growth and a weak recovery argue in its favor. We believe monetary policy has been too restrictive for too long,” defends Carsten Junius, chief economist at J. Safra Sarasin Sustainable AM, who forecasts more rate cuts in September, October and December.

Rate cuts ahead of the Fed

In the wake of the pandemic and facing an insurmountable price spiral, the Fed raised rates ahead of the ECB. Jerome Powell made his move in March 2022, and the ECB only began a wave of rate hikes in July of that year. But when it comes to cutting them down, Christine Lagarde is set to beat her American counterpart. The US economy continues to show signs of great strength, with inflation higher than in Europe, making it difficult for money prices to fall.

Lagarde insists that the ECB makes its decisions independently of the Fed, a point she will make when assessing what happens in the US, although she will inevitably be influenced by what the world’s most powerful central bank does. The first US rate cut is expected in September, although investors estimate its probability to be modest at 60%. If the cut had not happened then, the ECB would have found it more difficult to cut rates again without taking into account the impact of a weaker euro against the dollar. The gap in the value of money relative to the United States will widen, devaluing the European currency and making imports into the eurozone more expensive, especially raw materials. And again another inflation risk for the ECB and citizens.

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