In July 2022, the European Central Bank (ECB), became the final major central bank to raise interest rates amidst soaring inflation, with the Bank of Japan being the only exception. Sky-high energy costs pushed the Eurozone’s inflation to 8.6%, culminating at 10.6% in October, and ECB faced mounting criticism for its perceived sluggish reaction. The bank subsequently hiked interest rates nine more times in the quickest and largest surge in their history.
Fast-forwarding to 21 months later, the ECB is likely to be the central bank to lead the world in slashing rates, demonstrating the diverging inflation trajectories currently seen in Europe and the United States.
As of March, US inflation had escalated to 3.5%, surpassing predictions, causing financial markets to speculate that the Federal Reserve would postpone their rate cuts until September. On the contrary, Eurozone inflation dipped below expectations at 2.4% in March.
The ECB officials, in line with expectations, maintained the current rates in their Thursday meeting. Still, their official policy announcement did not shy away from acknowledging the possible rate cut in the forthcoming cycle, almost assuring a cut in the next June meeting.
“The decline in inflation or disinflation is a trend we’ve been noting. But, let’s not be overambitious or prematurely felicitate on this.”, cautioned ECB chief Christine Lagarde.
Nonetheless, Lagarde held that any forthcoming rate actions would rely on data. The potential obstacle is wage growth currently standing at 4.6%, considerably higher than Frankfurt’s comfortable 3% level in line with its 2% inflation ambition.
Lagarde confirmed that the initial quarter wage figures due in late May alongside updated ECB staff projections would be factored into the bank’s decision to cut rates in June.
Expectations are brewing in the markets for Frankfurt to cautiously execute a series of rate reductions in the latter half of 2024, which could be two, three, or even up to four, with potential for each decrement being 0.25 per cent. This could tally up to a decrease of 0.75 or 1 per cent in rates by the festive period, offering some respite for tracker mortgage holders in this region.
It is noteworthy that Lagarde’s briefing in Frankfurt concurred with a cautionary notice from the head of the International Monetary Fund (IMF), Kristalina Georgieva. She asserted that central banks should abstain from prematurely implementing interest rate decreases and that the battle against high inflation in advanced economies is yet to be entirely won.
Despite these cautionary notes, several marketwatchers continue to forecast a potential surprise surge in inflation, attributing this prediction to the unstable nature of commodity markets, specifically oil. Therefore, these speculated circumstances could shift the current outlook.