Breaking! The European Central Bank announces a 25 basis point rate cut! Previously, Canada has cut rates, what will the Federal Reserve do?
As the European Central Bank has fully communicated with the market, the pricing of this 25 basis point rate cut is very adequate, and its statement on the policy path for the second half of the year will become the focus of attention going forward.Author: Sun Zhicheng, Gai Yuanyuan, Daily Economic News
This week, several central banks in developed economies may take action ahead of the Federal Reserve.
On June 5, the Bank of Canada announced a 25 basis point cut to its benchmark overnight lending rate, lowering it from 5% to 4.75%. This marks the first rate cut by the Bank of Canada since the end of March 2020.
According to CCTV News, on June 6, the European Central Bank held a monetary policy meeting and decided to cut rates by 25 basis points after maintaining high rates for 22 consecutive months, with the main refinancing rate lowered to 4.25%, the marginal lending rate to 4.50%, and the deposit facility rate to 3.75%.
Many analysts also expect that the Bank of England, which will hold a monetary policy meeting in two weeks, may follow in the footsteps of the European Central Bank and the Bank of Canada.
On April 11, European Central Bank President Christine Lagarde attended a press conference at the ECB headquarters in Frankfurt, Germany.
According to Xinhua News Agency, industry insiders have analyzed that the European Central Bank has repeatedly conveyed to the market that it does not need to follow the Federal Reserve's actions. As the ECB has fully communicated with the market, the pricing for this 25 basis point rate cut is quite sufficient, and its statements regarding the policy path for the second half of the year will become the focus of attention.
The market is currently betting that after the ECB's first rate cut in June, there may be 1-2 more rate cuts within the year, with a lower likelihood of a cut in July and a 60% chance of a cut in September.
Carsten Brzeski, head of macro research at ING, commented that historically, the first rate cut is always accompanied by expectations of further cuts to support the economy or respond to crises. However, this time, neither situation exists. "Therefore, the ECB is at high risk of being forced to shift from 'one cut equals no cut' to 'one cut is the end.'"
According to the latest economic forecast from the European Commission, the Eurozone economy is expected to grow by 0.8% this year, an improvement from last year's growth rate of only 0.4%; next year's growth rate is expected to further increase to 1.4%.
However, alongside the economic recovery, high inflation in the Eurozone has not been effectively alleviated. Preliminary statistics released by Eurostat on May 31 showed that the Eurozone's inflation rate in May was 2.6% year-on-year, up from 2.4% in April.
Data shows that in May, service prices in the Eurozone rose by 4.1% year-on-year, food and beverage prices increased by 2.6%, non-energy industrial goods prices rose by 0.8%, and energy prices increased by 0.3%. The core inflation rate, excluding energy, food, and beverage prices, was 2.9%.
By country, the inflation rates for major EU economies in May were 2.8% for Germany, 2.7% for France, 0.8% for Italy, and 3.8% for Spain.
Carsten Brzeski, global head of macro research at ING, believes that the inflation trend in the Eurozone is similar to that in the United States, appearing to lag a few months behind. From a common perspective, the focus for inflation trends in both the US and Europe in the second half of the year will be on core service prices, with wage growth being a key factor guiding the trend of endogenous inflation momentum.
According to the Economic Daily, the latest Eurozone Purchasing Managers' Index (PMI) data indicates that the Eurozone economy is approaching a turning point. Although the composite PMI in March rose to its highest point since June 2023 and broke through the threshold for positive growth, the Eurozone manufacturing PMI was only 46.1, below the expected 47. Considering that the composite PMI for Germany, a major manufacturing country in Europe, has been in contraction territory for nine consecutive months and the latest data is far below the neutral line, the sluggishness of the manufacturing sector and weak outlook have become significant constraints on the future economic development of the Eurozone. However, with the arrival of rate cuts and easing, there will be a relaxation of bank credit conditions and an improvement in financing conditions, which will jointly support household consumption and business investment in the Eurozone, providing greater stimulus and support for EU manufacturing. Meanwhile, as financial conditions ease, fixed investment is also expected to rebound. Therefore, all parties believe that if the ECB maintains its current policy expectations and cuts rates as scheduled, the Eurozone economy will show a gradual strengthening trend in 2024.
According to Caixin, it is not difficult to foresee that as central banks around the world successively take rate-cutting actions, this is likely to put pressure on the Federal Reserve. The Federal Reserve will hold a two-day monetary policy meeting starting June 11 to discuss the next steps for interest rates. Although there is almost no possibility of the Fed taking rate-cutting measures at this month's meeting, the current easing actions of other non-US central banks may force the Fed to also start looking at the rate-cutting window within the year…
According to the CME FedWatch tool, traders now believe that the likelihood of a Fed rate cut in September has exceeded 70%, an increase of 10% from about 60% a day earlier. At the same time, the interest rate swap market has fully priced in two rate cuts by the Fed within the year.
