DWS Chart of the Week. It is now almost certain that the ECB will cut rates before the Fed.
We believe that the European Central Bank (ECB) will lower its key rates before the Federal Reserve (Fed). This now seems almost certain. While the first cut in interest rates in the single monetary area should therefore take place on June 6, the date of the first step across the Atlantic is still surrounded by large question marks. This sentiment strengthened after inflation in the euro zone fell to 2.4 percent in March.1 The development contrasts with that in the United States, where recent rising prices have led some Fed officials to say it could take even longer before interest rates are cut. Given the weak economy and lower inflation in the Eurozone, we think it is much less likely that the first rate cut will be delayed.
Lower inflation rates in the Eurozone help the ECB
But to what extent can the ECB detach itself from the Fed? Christine Lagarde certainly said that the ECB acted “based on data” and was in no way “dependent on the Fed”, and Mario Centeno, Portuguese member of the ECB Governing Council, also stressed that the central bank of Frankfurt “did not look at the United States”. But there are also other, very critical voices within the monetary policy council.2 “I would find it difficult if we moved too far from the Fed,” said Robert Holzmann, governor of the Austrian National Bank, for example. “If the Fed doesn’t cut rates at all this year, I find it hard to imagine us cutting rates three or four times.” Bostjan Vasle, governor of the Slovenian central bank, also adopts a slightly more cautious tone. “The economic situation in the United States is currently different from that in the eurozone,” he said. It is therefore logical, according to him, that the reaction of monetary policy would also be different. “But this divergence has limits.” Boris Vujcic, of the Croatian central bank, blows the same trumpet: “The longer the possible gap between us and the Fed, the more impact it will probably have.”
All central bankers of course have the exchange rate in mind, which is certainly not an objective of the central bank, but which is also taken into account when thinking about monetary policy. An interest rate differential, in which US interest rates remain higher for longer, could lead to a weakening of the euro. “A rapid devaluation would not fit into the structure and would revive fears of higher imported inflation, especially since the price of oil has already started to rise again,” said Ulrike Kastens, Europe economist at DWS . In this context, the discussion on the absence of a strong divergence in monetary policy between the euro zone and the United States is even welcome, because we believe that inflationary risks, particularly with regard to the prices of services, are always present. “We remain faithful to our vision of a gradual reduction in interest rates in the eurozone,” adds Kastens.3
1 Bloomberg Finance LP; updated: 04/22/2024
2 All quotes, unless otherwise noted, are from Bloomberg Finance LP; status: 04/22/2024
3 DWS Investment GmbH; updated: 04/22/2024
