The Frankfurt institute thus ignores the rebound in inflation observed in April in the euro zone at 2.6%.
The European Central Bank (ECB) carried out, as planned, an initial reduction in its key rates of 25 basis points. The Frankfurt institute thus ignores the rebound in inflation observed in April in the euro zone at 2.6%.
In detail, the interest rate on the main refinancing operations will be reduced to 4.25%, compared to 4.5% previously, that on the marginal loan facility to 4.50%, after 4.75%, and that on the deposit facility at 3.75%, previously at 4.0%, from June 12, the ECB announced Thursday in a press release.
“It is now appropriate to reduce the restrictive nature of monetary policy, after having maintained key rates at the same level for nine months,” said the ECB. Since the September 2023 meeting, inflation in the euro zone has fallen by 2.5 percentage points and the inflation outlook “has improved significantly,” the central bank continued in its document.
The ECB, however, warned that pressure on prices remained “strong”, due to rising wages, and inflation was expected to remain above the 2% target “for a large part” of 2025. Overall inflation is thus expected at 2.5% this year, compared to 2.3% in previous projections, at 2.2% (2.0%) the next and at 1.9% (unchanged) in 2026.
One step ahead of the Fed
“The Governing Council is determined to ensure the return of inflation to its medium-term target of 2% as soon as possible,” he insisted, adding that it “will keep key rates at a level sufficiently restrictive, for as long as necessary, to achieve this price stability target. The ECB will stick to the inflation outlook for the future.
Most experts expected a rate cut of 25 basis points. With this monetary easing, the European issuing institute is ahead of its American counterpart, the Federal Reserve (Fed). The Swiss National Bank (SNB) had already lowered its key rate by a quarter of a percentage point to 1.5% in March.
“After two years of stagnation, the European economy has seen positive developments in 2024. Growth is accelerating, unemployment has reached a historic low and inflation is normalizing, so the European Central Bank can start to lower interest rates,” observed Samy Chaar, chief economist at Lombard Odier.
According to Arthur Jurus, investment director for Oddo BHF Switzerland, “the criteria set by the ECB to consider easing monetary policy have been met” and “the inflation forecasts justify this decision”.
“Recent comments support our base case scenario of a rate cut of 25 basis points per quarter to the 2.25% level,” Jurus added in a commentary.
ECB: a first rate cut, and after?
The Frankfurt institution has for the first time in its history outdone its big sister in America, the Federal Reserve (Fed). The latter will have to wait to relax its policy because the dynamic economy of the United States is accompanied by a more stubborn price curve.
But the rest of this new cycle is far from being written. “It will be interesting to see what happens to interest rates after the summer. For further easing measures, the ECB will first and foremost want to see the economic data,” underlines Fritzi Köhler-Geib, chief economist at KfW.
Salary increases
The rise in consumer prices in the euro zone has been divided by more than four since the record of 10.6% over one year reached in October 2022, when energy prices were soaring because of the war in Ukraine and disruptions to global supply chains linked to the Covid-19 pandemic were still being felt.
Inflation started to rise again in May, reaching 2.6%, after 2.4% in April and March. But this slight jump does not call into question the downward trend in the aggregate, underline the experts.
The ECB nevertheless wants the rise in consumer prices to reach the 2% target it has set by 2025.
It is therefore attentive to “the possible second round effects of salary increases”, given the upward acceleration of salary agreements, to 4.7% over one year in the first quarter of 2024, explains Franck Dixmier, head of bond management. at Allianz GI.
A significant increase in labor costs could be reflected in sales prices and therefore fuel inflation, unless companies reduce their margins.
Break until September?
The debate therefore promises to be lively on the pace of rate cuts. To fuel the discussion, the European Central Bank will have a new set of economic projections.
The ECB “will want to see a relaxation of the strong pressure which persists on prices in services”, where the wage component is strong, underlines Fritzi Köhler-Geib.
Other cost developments will be monitored such as those of “maritime freight influenced by the crisis in the Red Sea”, according to Mr. Dixmier.
Nuances within the ECB between the “doves”, supporters of a flexible monetary course, and the “hawks” followers of monetary orthodoxy, have already become apparent.
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 Bundesbank, the German central bank.
The governor of the Bank of the Netherlands, Claas Knot, made a remarkable exit at the end of May by affirming that the ECB meetings accompanied by economic projections would constitute, in his eyes, the “key moments for (the) decisions on interest rates. ‘interest”.
These projections are published quarterly, with the next ones scheduled for September and December.
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”.
