With inflation in the euro zone on hold, not completely controlled, the European Central Bank has activated the expected cut in interest rates. The institution has not deviated from its roadmap and has lowered the governing rates by 25 basis points, thus ending their highest level since 2001.
Once the market has digested the initial commotion caused by the increase in its inflation forecasts for this year and 2025 – two tenths but enough to delay the 2% objective to 2026 –, economists and analysts are now focusing their speculations on what the speed will be. what the ECB will take to continue with the cuts. “Attention is now focused on the future pace of easing, which remains uncertain,” says Azad Zangana, Economist and Senior European Strategist at Schroders. Christine Lagarde, its president, was inflexible in her appearance on Thursday and did not commit to the pace of future declines, stressing that the road is still full of potholes and that the institution will analyze data by data.
“Although the Governing Council has lowered its cruising altitude somewhat, the flow of data in the coming months will decide the speed at which the ECB will remove additional restrictions. In the meantime, we expect policy to remain restrictive and decisions to be made meeting by meeting, with the ECB unlikely to commit in advance to a specific rate path,” estimates Konstantin Veit, portfolio manager at Pimco.
With the cruise control button deactivated, analysts rule out a new decline in the July meeting and are betting that new declines will come in the meetings in which the BCE presents new economic projections. That is, in September and December. “Although consecutive rate cuts are unlikely, the ECB has plenty of room to surprise cautious investors,” acknowledges the Schroders expert.
The market consensus predicts that the central bank will execute two more cuts this year and another three in 2025. Although there are still firms like Moody’s that are betting on a more aggressive movement this year and foresee three decreases. John Plassard, senior investment specialist of Mirabaud WM, further adds that “it can be assumed that no decision will be made before September, and that Jackson Hole will once again provide us with more information on the matter.” The traditional symposium of central bankers, which will be held this year between August 22 and 24, will once again be a key stage for knowing the script to be followed in the following months by the United States Federal Reserve and the ECB. In the case of the Fed, the theme of the intervention of its president Jerome Powell already acts as a vanguard: “Reassessment of the effectiveness and transmission of monetary policy.”
The Governing Council of the ECB has shown less visibility regarding the trajectory of the governing rates in 2025. UBS’s base scenario, which it maintains unchanged, involves a cut of 100 basis points next year, “which would bring the rate of deposit at 3.25% at the end of 2024 and at 2.25% at the end of 2025.” Now, they comment, “we see a risk that the ECB will cut rates by less than 100 basis points next year.” On the other hand, Bank of America estimates that persistent inflation below the target will “end up pushing (giving a sense of urgency) to accelerate the cut cycle more than they currently expect.”
The elephant in the room now is when the Federal Reserve will execute the first rate cut, already ruled out by the market that it could arrive next week. “The ECB is probably following currency movements closely and may want to wait a little longer, as uncertainties on the other side of the Atlantic remain high,” comment Hugo Le Damany and François Cabau, economist and senior eurozone economist. of AXA Investment Managers, who estimate that the “ultra-precautionary approach” used this Thursday by Lagarde was not necessary: “We find it difficult to understand the reason for not providing any future guidance for short-term meetings. This probably confirms that the decision has not been consensual, but rather results from a compromise reached previously.”
For now, the US labor market continues to show signs of strength. In May, it generated 272,000 new non-agricultural jobs in May, according to figures released this Friday by the Bureau of Labor Statistics, dependent on the Department of Commerce. The figure exceeds all forecasts and sends a new message of a soft landing for the US economy, which once again pushes away the rate cut or even quarantines it.
The concern shown by Lagarde about the behavior of salaries and their impact on inflation is seen, on the other hand, as one of the main obstacles to achieving the last mile of inflation. The president of the ECB pointed out that some indicators already show that wage growth is beginning to stabilize and suggested that it will be normalized in 2026. Furthermore, Pimco is influenced by the uncertainty about business profit margins and productivity, the great ballast, the latter of European companies, which has no signs of improving.
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