The ECB did not disappoint the predictions and cut the interest rates by 25 basis points. The widely expected reduction led to the central bank’s key rate falling to 3.75%, from the record threshold of 4%, where it has been since September 2023.
But will there be other cuts? Here are the comments of some experts following today’s decision by the ECB.
ECB rates: the analysts’ view
“The ECB’s decision to raise rates after the Fed and cut them before indicates different inflationary dynamics across the Atlantic. Eurozone inflation is largely attributed to negative terms of trade rather than excess demand,” he underlines Sylvain Broyer, Chief Economist EMEA of S&P Global Ratings who goes as far as to hypothesize that there will be no further reductions.
That said, it seems unlikely that the ECB will make more than two rate cuts alone before the Fed starts this year. Furthermore, the Fed’s rate cuts are expected to extend into 2026, well beyond the completion of the ECB’s cuts. Assuming inflation aligns to targets and growth reaches potential by the middle of next year, as expected, the ECB is likely to limit rate cuts to no more than one per quarter until the third quarter of 2025, with a minimum deposit rate of 2.5%”
The ECB’s interest rate cut, widely expected today, will be a relief for the Eurozone economy. For the future, the forecasts are the opposite of those of S&P. The inflation outlook, as indicated by the ECB’s latest projections, points to further reductions in interest rates over the course of the year, underlines Dean TurnerChief Eurozone and UK Economist at UBS Global Wealth Management.
Naturally, the timing of the ECB’s next move is uncertain, as it will depend on the next data. However, with the disinflationary process firmly underway, the ECB, along with other central banks, should feel confident enough to ease their strategy, probably at a rate of one cut per quarter. Furthermore, we should expect this rate-cutting cycle to continue through 2025.
With the Eurozone rate cut cycle underway, a key priority for investors is managing liquidity needs. Current cash yields, while attractive, will not be available for much longer. We support reducing cash and cash-like investments in favor of those that can deliver longer-lasting returns, such as a portfolio of quality bonds.
“As expected, the ECB cut rates to 3.75% after having reached the highest level in its existence for over a half-year” he underlines instead Kaspar HenseBlueBay Senior Portfolio Manager, Investment Grade, RBC BlueBay.
We do not expect this decision to be followed by a round of cuts. Although Europe was hit even harder by rising gas prices after Russia’s invasion of Ukraine, these underlying effects have receded significantly.
The repercussions on the financial markets
After the Frankfurt announcement on rates, the markets equity of the euro zone maintained the positive tone of the morning while on thebond yields have risen.
According to Morgane Delle Donne Of Global the European stocks they are looking for a spark that will take them above recent record levels, due to the realization of a soft-landing scenario in the region, and a more accommodative monetary policy stance from the ECB could prove to be such. Macroeconomically sensitive sectors such as real estate, travel and leisure and consumer discretionary lagged the European benchmark. Although the valuations of European stocks are 58% cheaper than their US counterparts, the proximity to geopolitical conflicts in Europe and the Middle East, the upcoming European elections, the ECB’s limited room for maneuver and the growth differential compared to other regions could limit upside potential next quarter.
“Overall, today’s upward revision of inflation forecasts for next year was interpreted by markets as a relatively hawkish move, with the euro appreciating against the dollar despite the rate cut. I expect the ECB to cut only once more in 2024, given the growing possibility that the Fed will not cut rates this year and given that the ECB has revised its inflation forecast for 2025 to 2.2%, compared to its 2% target. I expect the ECB to try to avoid a widening of spreads between the two regions, which could otherwise lead to a consequential collapse of the euro against the US dollar” concludes the expert.
