ECB ready to cut rates: what to expect after June

The time is now ripe for the ECB which, in the meeting of Thursday 6 June, is preparing to carry out a first interest rate cut of the Eurozone. A move deemed necessary to revitalize the limping economy and compatible with inflation now back towards the 2% target.

The cut, for the first time in history, will anticipate the actions of the Federal Reserve, more cautious in planning a reduction in interest rates, given that US inflation persists above 3%. If it moves, the US central bank will do so in September and no more than a 25-point cut is expected by the end of the year, while the ECB could announce between now and the end of 2024 at least two rate cuts of 25 points each for a total of half a point.

But what do analysts think of this early move? And what will the impacts be on the markets?

First modest cut

Although a 25-point rate cut by the ECB now appears to be a certainty, however, experts at Degroof Petercam Asset Management​ (DPAM) they do not believe that this is sufficient to revive the fortunes of the continental economy.

“Such a modest cut would maintain the monetary policy still decidedly restrictive“, explains Lowie Debou, Fixed Income Manager at DPAM, adding “keeping a rate that is too restrictive for too long increases the probability of a recessionary drift. However, if the ECB started cutting rates now, it could act in a more restrained way compared to previous cycles, keeping the storytelling linked to a soft landing intact.”

Negative impact on the euro expected

According to Michele Sansone, country manager of iBanFirst Italythe rate cut by the ECB before the Fed would be “historically anomalous” and it might have a negative impact on the exchange rate ofEURworsening inflation imported into Europe.

For the expert “it is difficult to deny that the window for rate cuts is closing rapidly across the Atlantic” and this could mean that the ECB will be the first to take a step in this direction, beating both the Fed and the Bank of England.

From Vice President Philip Lane's recent speech, this year's goal is to ease monetary policy while keeping it slightly restrictive for avoid inflation peaks unexpected. This aligns with three or four 25 basis point rate cuts. Next year, the aim will be to bring monetary policy to neutral territory, which implies three or four more such cuts.

What will happen after June?

For PIMCO analysts, the first cut this week is therefore taken for granted the trajectory after June will be more interesting. “We doubt that the ECB will provide much guidance on this matter and we expect you to reiterate yours “meeting by meeting” approach based on the data flow of the coming months,” says Konstantin Veit, Portfolio Manager at PIMCO, believing “it is unlikely that the ECB will commit to a particular path for rates”.

“Once the ECB starts cutting rates – continues the expert – we expect that will proceed with caution, with conventional 25 basis point steps”. In any case, “the risks lean towards fewer cuts, especially due to the stability of services inflation, the stability of the labor market, the easing of financial conditions and the considerations on risk management by the ECB”.