The European Central Bank’s (ECB) decision to cut its benchmark interest rate for the first time since 2019 underscores a strategic but cautious approach to managing persistent inflation in the Eurozone. The move reflects a balance between acknowledging progress made in reducing inflation and recognising that further action may be needed to stabilise the economy.
The cut is seen as a cautious but significant step in the ECB’s ongoing efforts to manage inflation and support economic growth. Analysts see a measured approach to future cuts, emphasising the importance of economic data in shaping policy.
They advise investors to remain vigilant, considering both domestic and international factors influencing the Eurozone’s economic landscape, amid signals that inflation is stubborn. The ECB’s new forecasts indicate that inflation will remain above its 2 percent target well into 2025.
Amundi sees limited scope for divergence from Fed
Monica Defend of the Amundi Investment Institute highlights that the ECB’s decision aligns with market expectations, avoiding any surprises. "Recent Eurozone inflation data indicate that there is no need for the central bank to cut again at its next policy meeting," she said in a note to investors.
Defend said she foresees the potential for another rate cut in September, contingent on inflation trends. She also noted the limited scope for divergence from the Federal Reserve, suggesting that any prolonged divergence could impact the foreign exchange market.
Generali sees three more cuts in 2024
Generali Asset Management’s Mauro Valle points out that today’s balanced decision does not alter expectations for further cuts, with the possibility of three reductions by year-end. "The ECB has room to cut again in the second half of the year, as monetary policies will be yet perceived as restrictive," he explained.
Valle underscores the importance of upcoming economic data, particularly inflation and wages, in shaping future policy decisions. He maintains a positive outlook on German rates and short-to-medium maturities of the euro yield curve, while cautioning against a sustained rates rally.
Inflation targets remain elusive, says DWS
Ulrike Kastens from DWS anticipates further ECB rate cuts in September and December, citing differences in economic and inflation cycles between Europe and the United States.
"As we had expected, the ECB did not pre-commit to a specific path for further interest rate cuts," she noted. Kastens underscored the ECB’s data-dependent approach, with gradual interest rate reductions likely as inflation targets remain elusive.
Despite a significant reduction in inflation from over 10 percent in late 2022 to 2.6 percent today, ECB President Christine Lagarde emphasised that domestic price pressures remain robust, driven by elevated wage growth.
Watch services inflation, says JP Morgan
J.P. Morgan Asset Management’s Natasha May focuses on services inflation as a critical determinant of future ECB actions. "Wage growth is still high, but slowing – the ECB expects this slowing to continue, which should help ease labour-intensive services inflation," she said on LinkedIn. May expects gradual rate cuts framed as normalisation rather than aggressive easing, benefiting the Eurozone’s bank-lending dependent economy.
Salman Ahmed of Fidelity International echoed the cautious tone, noting that while the ECB has commenced its rate-cutting cycle, future cuts will depend on evolving economic data and US monetary policy. "The ECB’s rate trajectory will depend on the evolution of data from here on and the Fed, which we think will be unable to cut this year," he asserted.
Quintet warns against rapid reductions
Daniele Antonucci from Quintet Private Bank highlighted the supportive role of future rate cuts for consumption and investment, potentially boosting economic growth.
"Our view is that the ECB should be able to lower rates a couple more times this year, though likely not at each upcoming 2024 meeting," he commented. However, he warns against rapid rate reductions, citing inflationary risks from a depreciating euro if the Federal Reserve maintains higher rates.
Pimco skewed toward fewer cuts
Pimco’s Konstantin Veit said he expects the ECB to continue cutting rates at staff projection meetings, with the next opportunity in September. "Given the ECB’s reaction function, we envision the ECB to keep cutting rates at staff projection meetings," he said. Veit sees risks skewed towards fewer cuts, driven by sticky services inflation and a resilient labour market.
Mahdi Mokrane of Patrizia highlighted the positive impact of the rate cut on real estate markets, although immediate effects may be limited.
"One reduction alone will not have an immediate, significant impact on market dynamics, but it is undoubtedly a step towards more supportive and constructive market activity," he remarked. Mokrane anticipated increased transaction activity and international capital inflows, with the potential for more aggressive rate cuts if economic conditions warrant.
For investors and asset owners, the rate cut signals both potential opportunities and risks. Lower interest rates can reduce borrowing costs, potentially boosting consumer spending and corporate investment, which may support equity markets. However, the persistence of inflation above target levels suggests a cautious approach.
Further reading on Investment Officer:
- Seeing northern lights? Almost as rare as an ECB interest rate shift
- ‘Keep going, there’s nothing to see here’
- More analysts expect zero Fed rate cuts before end of year
