The European Central Bank (ECB) is expected to cut interest rates tomorrow (June 6) as growth flags across Europe.
Earlier today, the Bank of Canada reduced its target for the overnight rate to 4¾%, with the Bank Rate at 5%, noting that the global economy grew by 3% during Q1 of 2024. In Canada, At GDP growth registered 1.7% during the Q1, slower than forecasted. The Loonie drooped against the US dollar on the cut.
Henk Potts, Market Strategist at Barclays Private Bank, said that after nine months of rates being on hold, the ECB will cut rates by 25 basis points.
“Our view is that the Governing Council’s rationale will likely be driven by a stronger-than-expected recovery in activity and increased confidence that inflation will return to the targeted level. Beyond the June meeting, we forecast that we could see quarter-point cuts in September and December. In addition, we expect to see 75 basis points of cuts next year, with the deposit rate finishing 2025 at 2.5%.”
Ruslan Lienkha, chief of markets at YouHodler, shared Potts’s belief that rates will likely drop by 25 bps. Lienkha said that while inflation has declined since the beginning of the year the decrease has not been as fast as the ECB would like.
“It seems that high rates harm the economy disproportionally more than have a positive impact on inflation. This effect will push the ECB to start QE earlier.”
Lienkha said the biggest problems for the EU are the cost of energy and the need for logistic improvements and diversification of energy imports.
Nigel Green, CEO of deVere Group, said the ECB is moving out of step with its major central bank peers.
“It’s almost certain the ECB will cut rates on Thursday, after keeping them steady since last October, following 10 consecutive rises. The move has been widely flagged as economists raise concerns about a divergence from the US Federal Reserve and the Bank of England among other central banks.”
Green pointed to the persistent problem of inflation as well. A cut will probably mean a weaker Euro.
“Investors are likely to be eyeing hedging strategies such as forward contracts, options, or currency ETFs to protect against adverse currency movements. Investing in assets denominated in stronger currencies, like the US dollar, can also provide a buffer against a declining euro. With the US Federal Reserve diverging by delaying rate cuts, investments in US assets are going to become more attractive.”
US markets anticipate one or two rate cuts towards the end of the year, while some prognosticators expect no cuts until 2024. The Fed says it is data-driven, but a looming election could influence decisions.
