FRANKFURT – The European Central Bank has followed up months of messaging about plans to lower Eurozone borrowing costs with quarter-point reductions in its main interest rates.
Thursday’s moves were widely expected by economists and take the lender’s main refinancing rate to 4.25%, the marginal lending rate to 4.50%, and the deposit rate to 3.75%. It also put the bank ahead of the US Federal Reserve, which could wait until the autumn or beyond to begin its expected cycle of rate cuts, with observers expecting two decreases this year.
The move to lower borrowing costs came after a series of post-pandemic rate hikes designed to fight inflation later exacerbated by the Russian attack on Ukraine in 2022.
As the ECB takes steps to reign in its policy, traders have priced in a reduction in September and another in December.
Deutsche Bank called Thursday’s decision a “hawkish cut”, and other observers noted that the language of the monetary policy decision suggested a pause – however brief – in the stepdowns.
Danske Bank’s Piet Haines Christiansen tweeted: “Take note of the word ‘keep’ in this sentence: ‘(The governing council) will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim’.”
He added that this suggests no pre-commitment to a particular rate path and that a July cut is likely out of the question.
An unexpected rise in May Eurozone inflation announced last week had already prompted multiple analysts to predict a hold at the upcoming meeting next month and even had some wondering why the bank would lower rates as inflation appeared on the rise.
The ECB's June inflation forecasts (blue) versus the March expectations.
In fact, the ECB has added two-tenths of a percentage point to its own euro area inflation expectations for this year and next, raising them to 2.5% and 2.2% respectively. Its projection for 2026 remained at 1.9%, which compared to its target of 2% over the medium term. These latest adjustments also had observers wondering why the bank cut rates this week.
ECB President Christine Lagarde told journalists that the vote for the cuts was unanimous except for one member of the governing council, which the media later reported as ECB hawk Robert Holzman, head of the bank of Austria.
A jump in the yield spread between US and German 10-year government bonds may have rattled some, but Pictet’s Frederik Ducrozettweeted: “Let’s not get distracted by short-term market reaction and keep it simple: the ECB clearly suggests that more easing will be needed if disinflation continues. September should remain wide open for the next cut.”
'Have a good summer'
When ending Thursday’s press conference, Lagarde said, “Have a good summer”, apparently addressing the journalists in attendance. It was as if her mind was already past the 18 July meeting and on the following get-together on 12 September.
During the Q&A, she held up a favourite old chestnut of her tenure, ie that the bank will remain data-dependent when considering monetary policy.
However, even if there were a policy hold in July, the ECB appears in to be in a downward stance when it comes to interest rates.
Asked if the bank was moving into a dialling-back phase, Lagarde replied: “I wouldn’t volunteer that.” But then she cracked the door: “I cannot confirm that it is a dialling process that is underway. There is a strong likelihood.”
Along with rate cuts and arcane information on its next steps, the bank also announced plans to reduce the portfolio of financial assets in its Pandemic Emergency Purchase Programme (PEPP) by an average of EUR 7.5 bn a month, with reinvestments to be discontinued at the end of this year.
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- Reduction across the board in-line with forecasts
- Only one official opposed move, Lagarde says
- Further cuts appear likely, timing unclear
- Have a good summer?
By Eric Culp
European Editor, LiveSquawk News
@EricCulpLS
6 June 2024 | 15:05 GMT
FRANKFURT – The European Central Bank has followed up months of messaging about plans to lower Eurozone borrowing costs with quarter-point reductions in its main interest rates.
Thursday’s moves were widely expected by economists and take the lender’s main refinancing rate to 4.25%, the marginal lending rate to 4.50%, and the deposit rate to 3.75%. It also put the bank ahead of the US Federal Reserve, which could wait until the autumn or beyond to begin its expected cycle of rate cuts, with observers expecting two decreases this year.
The move to lower borrowing costs came after a series of post-pandemic rate hikes designed to fight inflation later exacerbated by the Russian attack on Ukraine in 2022.
As the ECB takes steps to reign in its policy, traders have priced in a reduction in September and another in December.
Deutsche Bank called Thursday’s decision a “hawkish cut”, and other observers noted that the language of the monetary policy decision suggested a pause – however brief – in the stepdowns.
Danske Bank’s Piet Haines Christiansen tweeted: “Take note of the word ‘keep’ in this sentence: ‘(The governing council) will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim’.”
He added that this suggests no pre-commitment to a particular rate path and that a July cut is likely out of the question.
An unexpected rise in May Eurozone inflation announced last week had already prompted multiple analysts to predict a hold at the upcoming meeting next month and even had some wondering why the bank would lower rates as inflation appeared on the rise.
In fact, the ECB has added two-tenths of a percentage point to its own euro area inflation expectations for this year and next, raising them to 2.5% and 2.2% respectively. Its projection for 2026 remained at 1.9%, which compared to its target of 2% over the medium term. These latest adjustments also had observers wondering why the bank cut rates this week.
ECB President Christine Lagarde told journalists that the vote for the cuts was unanimous except for one member of the governing council, which the media later reported as ECB hawk Robert Holzman, head of the bank of Austria.
A jump in the yield spread between US and German 10-year government bonds may have rattled some, but Pictet’s Frederik Ducrozet tweeted: “Let’s not get distracted by short-term market reaction and keep it simple: the ECB clearly suggests that more easing will be needed if disinflation continues. September should remain wide open for the next cut.”
'Have a good summer'
When ending Thursday’s press conference, Lagarde said, “Have a good summer”, apparently addressing the journalists in attendance. It was as if her mind was already past the 18 July meeting and on the following get-together on 12 September.
During the Q&A, she held up a favourite old chestnut of her tenure, ie that the bank will remain data-dependent when considering monetary policy.
However, even if there were a policy hold in July, the ECB appears in to be in a downward stance when it comes to interest rates.
Asked if the bank was moving into a dialling-back phase, Lagarde replied: “I wouldn’t volunteer that.” But then she cracked the door: “I cannot confirm that it is a dialling process that is underway. There is a strong likelihood.”
Along with rate cuts and arcane information on its next steps, the bank also announced plans to reduce the portfolio of financial assets in its Pandemic Emergency Purchase Programme (PEPP) by an average of EUR 7.5 bn a month, with reinvestments to be discontinued at the end of this year.
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