There are “strong arguments in favor of a rate cut in June”, Bank of Finland Governor Olli Rehn, who sits on the ECB’s governing council, recently told AFP.
Several of his colleagues expressed themselves along the same lines.
The size of this first rate cut after the hike cycle is expected to be 25 basis points, according to experts. This would bring the rate on deposits from 4%, its highest reached last September, to 3.75%.
If the decline is confirmed, the ECB will ignore the politeness of the American Fed for the first time in its history in this area.
Inflation started to rise again in May in the euro zone, to 2.6% over one year after 2.4% in March and April, according to figures published on Friday.
This rise “is linked to temporary factors”, commented Riccardo Marcelli Fabiani, analyst at Oxford Economics.
As a result, it “will not prevent the clearly announced drop in interest rates in June. But the ECB will be cautious and it is unlikely that it will lower its interest rates (again) at the ECB meeting. July,” he estimated.
The bulk of disinflation has taken place in the euro zone, since the peak of more than 10% price increases reached in October 2022.
The ECB nevertheless intends to see it fall further towards the 2% objective it has set.
“The most interesting question” on Thursday around the table of the Governing Council will therefore be to know “to what extent the ECB will be willing to give guidelines” on its rates beyond June, Dirk Schumacher told AFP, economist at Natixis.
On this subject, nuances within the ECB between the “doves”, supporters of a flexible monetary course, and the “hawks” followers of monetary orthodoxy, have already emerged in recent days.
After June, a second consecutive rate cut in July is anything but 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, pleaded for “maximum optionality”, the ECB having to maintain its “freedom on timing and pace”.
To fuel the discussion, the ECB will have a new set of economic projections.
In March, the institution said it expected inflation to reach its target of 2% in 2025.
Since then, both GDP and inflation in the euro zone have surprised somewhat on the upside.
But the new updated projections “should only show marginal changes, which would in principle allow regular rate reductions”, believes Mr Schumacher.
An indicator commented on recently, the growth of negotiated salaries, rebounded to 4.7% year-on-year in the first quarter, after 4.5% in the last quarter of 2023, due in particular to one-off bonus payments.
“The ‘hawks’ will highlight the continued strong growth in wages which should call for caution” on rates, adds the economist.
In this context, the ECB could only reduce its rates once a quarter to bring the deposit rate to 3.25% at the end of 2024,” predicts Holger Schmieding, at Berenberg.
The Fed or the Bank of England could, for their part, only relax their monetary policy towards the end of the year, in the face of inflation remaining resilient.
