ECB Set to Start Rate Cuts, But Path Remains Unclear

After maintaining the deposit rate at 4% for nine months, the Bloomberg poll shows the market expects a 25 bps cut to 3.75%.

The ECB is on the brink of cutting interest rates from its current records as most policymakers believe that inflation is contained and can be let off the hook to a certain extent.  

After maintaining the deposit rate at 4% for nine months, the Bloomberg poll shows the market expects a 25 bps cut to 3.75%. This is because ECB officials have been indicating that the ECB might be ready to ease monetary policy even before the Federal Reserve and the Bank of England, which are dealing with higher inflation. 

Related: ECB No Longer Dependent on the Fed? 
 

However, beyond the next couple of months, the path for the ECB will still be obscure. New data showing a higher economic growth rate, continuing inflation, and increasing wages have made many analysts more cautious. Three rate cuts are still to take place this year, according to experts.
 

Even the most pessimistic members of the ECB’s Governing Council, like Bundesbank President Joachim Nagel and ECB Executive Board member Isabel Schnabel, confirm that the current conditions call for the upcoming cut. Notwithstanding the new economic numbers, this alignment points out a certain concession level in the ECB’s approach.  

Soeren Radde, an economist at Point72, said that the ECB’s capacity to cut rates this week could be more political than in response to economic signals, showing that the work of central banking is not a simple one in any crisis. Anatoli Annenkov from Societe Generale also pointed out that recent indicators do not fully underpin the policy shift towards easing, causing some concern over the ECB’s precise timing of the June cuts that were signalled at the beginning of the year.  
 

Bloomberg Economics is expecting a concrete 25-bps cut today. Senior euro-area economist David Powell suggests that while Lagarde may not announce more cuts in July, she could drop enough hints to suggest more easing in September. This approach can be seen as a reflection of the ECB’s policy-making predicament between present and future risks.  

Some of the speakers, such as the Bank of France Governor Francois Villeroy de Galhau, have suggested that the possibility of another consecutive rate cut in July should be maintained, while others, such as Italy’s Fabio Panetta, have said that the monetary policy will still be robust despite the several cuts. This rather subtle discussion occurs as the ECB concentrates its efforts and attention on three central meetings held in June, September and December. These sessions are critical mainly because they co-occur with the provision of new economic forecasts and include more data on wages, profits, and productivity, as noted by the Dutch central bank chief Klaas Knot.  

Sophie Lund-Yates, an analyst at Hargreaves Lansdown, also expounds on this view of the market, describing a ‘disconnect’ not in the timing but in the degrees of rate cuts expected.  
 

For the immediate future, the ECB's new forecasts are not expected to differ much from the previous ones. According to the Bloomberg survey of economists, though, inflation is expected to reach target rates by 2025. However, after a good start in the first quarter of the current year, there could be some space for a minor increase in these growth rates for this year.  

An important parameter to watch will be the main inflation prediction of 2% for 2026. Any increase could indicate that the extent of further easing remains quite tight. According to JPMorgan economist Greg Fuzesi, these projections, made by national central banks and ECB staff, have generally been on the more cautious side.  

"The standard assumption is that the impact on GDP is around half of this," Fuzesi said. "Hence, the amount of easing remains relatively modest for now."

On the global front, the ECB’s strategy appeared to follow the Federal Reserve's lead until recent events suggested that the persistent inflation categories in Europe were the same challenge facing US policymakers. These inflationary pressures have led to a reassessment of the monetary easing policies; however, traders still expect a rate cut before the end of the year.

So far, some of the other major central banks, such as the Bank of England, have not cut rates this month, while the Bank of Canada has done so. Other non-Euro European regions, including Sweden's Riksbank and the Swiss National Bank, have also started following an easing policy by their central banks. This also shows that global economic problems are being tackled differently across various financial systems.