After raising interest rates ten times in a row, the European Central Bank (ECB) clarified the conditions for easing monetary policy. Analysts pointed out that in its April monetary policy decision, the European Central Bank paved the way for an upcoming interest rate cut. The European Central Bank may take the lead in cutting interest rates independently of the Federal Reserve in June, but the space for future interest rate cuts is limited.
Judging from the decisions and statements issued by the European Central Bank on Thursday, the Governing Council has become more firm in its expectation that inflation will continue to fall, and made it clear that if this trend continues, easing monetary policy (cutting interest rates) may be "appropriate." But at the same time, it was emphasized that "the ECB Governing Council will not commit to a specific interest rate path in advance" and future actions will depend on data.
After the Board of Governors' decision was announced, the decline of the German Dax index quickly narrowed; the Euro (1.0724, -0.0002, -0.02%)/USD exchange rate briefly fell below the 1.0720 mark.
European Central Bank President Christine Lagarde said in response to reporters' questions that day that Thursday's monetary policy decision did not receive unanimous support from the board of governors' decision-making members, and some members advocated cutting interest rates this month.
However, the Board of Governors statement pointed out that the service industry inflation rate (4.0%) is still high. This is a sign of greater price pressures. Lagarde also said the energy price shock had a "significant impact". The European Central Bank is paying very close attention to developments such as the recent rise in oil prices.
With inflation rising further in March, hopes of a quick interest rate cut in the United States are becoming increasingly slim. Lagarde, who was asked several times to comment on inflation in the United States on Thursday, said the drivers of inflation in the United States were different from those in the euro zone. She emphasized that the ECB does not commit to the path of interest rates in advance and does not speculate on what is happening in other currency areas. All actions depend on data.
The Eurozone inflation rate has recently been close to the European Central Bank's 2% target. According to preliminary estimates from EU statistics, the consumer price index in the euro zone rose by 2.4% in March. Core inflation, which excludes fluctuations in energy and food prices, also fell to 2.9% from 3.1% in February.
The European Central Bank expects inflation to fluctuate somewhat around current levels this year. Inflation will fall to the 2% target by mid-2025.
Before the European Central Bank's June monetary policy meeting, the euro zone will also release two monthly inflation data.
Although Lagarde declined to commit to a rate cut in June on Thursday, experts generally interpreted the statement as confirmation of the first rate cut in June.
Robert Greil, chief strategist at private bank Merck Finck, said the European Central Bank has built a bridge to a possible first interest rate cut in June.
Mark Wall, chief European economist at Deutsche Bank, said no one would be surprised by a rate cut in June. The question is whether the ECB's continued caution on inflation means further interest rate cuts after June are less likely.
Jörg Kramer, chief economist at Commerzbank, said that the European Central Bank unexpectedly strengthened its signal of cutting interest rates for the first time in June. Unless there are many major changes, the European Central Bank will not lower interest rates in June.
Carsten Brzeski, head of ING's macro research department, commented that this is the first time that the European Central Bank (since this round of interest rate hikes) has talked about easing monetary policy in an official policy announcement. A monthly rate cut opens the door. Inflation developments in the United States suggest that risks remain. The recent surge in oil prices, as well as wage developments in Germany, also bear this out. As a result, the ECB has limited room to cut interest rates significantly after its June meeting.
It is worth noting that as expectations of rapid interest rate cuts in the United States dissipate, the market's medium and long-term interest rate benchmarks are rising rapidly. The U.S. ten-year Treasury bond yield hit 4.60% on the 11th, which was the first time it had reached such a high since November 14 last year.
Interest rates in the United States and Europe have also expanded significantly. The spread between the ten-year Treasury bond yields in Germany and the United States has now expanded to more than 200 basis points. This has put obvious pressure on the exchange rate of the euro against the US dollar. In the past three trading days, the euro/US dollar has quickly fallen from above 1.0850 to the 1.0700 line. It may only be a matter of time before it hits a new low for the year (1.0695).
Some experts believe that independent of the Fed taking the lead in cutting interest rates, the European Central Bank will face new pressure from the depreciation of the euro, because this may trigger new imported inflation.
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2024-04-12
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