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Friday, July 19, 2024

Let's go to a rate cut in June and see

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The ECB is seriously considering its next moves

  • The ECB is seriously considering its next moves
  • The FED is hesitant to taper first

With slow and steady steps it seems that the European Central Bank is moving to reduce interest rates. Although they are predicted to decrease next month, however, no one can predict how they will move in the months to come due to the “wounds” left behind by the Ukrainian and Palestinian.

The German Isabel Schnabel, a member of the ECB's Executive Committee, said a few days ago that, “based on the current data, the interest rate cut in July does not seem justified. We should take a cautious approach. After so many years of very high inflation and with inflation risks still on the upside, front-loading the easing process would come with the risk of premature easing.

He noted that “further progress on inflation, and domestic inflation in particular, is needed to strengthen our belief that inflation will return firmly to the 2% target no later than 2025”.


“Depending on the data and the new forecasts that the Eurosystem staff will present to us, an interest rate cut in June may be appropriate. But the path after June is much more uncertain,” he added.

As he said, “we are facing very high uncertainty, which is also reflected in market expectations. We've moved from six rate cuts at the start of the year to about three rate cuts now. Because of this uncertainty, it is too early to say what is going to happen andwe cannot pre-commit to any specific rate path“.

The scenarios of the technocrats

The ECB is working on scenario base:

  • The first scenario is based on forecasts that wage growth slows, productivity growth recovers and companies absorb higher wage costs into their profit margins.
  • In the second scenario, the data do not confirm a slowdown in wage growth, a recovery in productivity or absorption of higher wage costs through earnings. Thus, there may be new shocks that could disrupt the deflationary process.

The ECB may cut interest rates before the US Federal Reserve as it could affect the foreign exchange market and a a weaker euro could have an impact on prices and the economy.

On the other hand, the Fed needs more data to be sure inflation is moving toward its 2% target. According to central bank official Loretta Mester, “interest rates need to stay high for longer. Monetary policy is in a good place right now, and inflation is expected to slow at a slower pace than last year. The economic data show that it will take more time to gain confidence”, he concluded.

source: Brief/By Chrysos Antoniadou

Source: 24h.com.cy

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