"The time has come to start cutting interest rates." Officials from the European Central Bank (ECB) have once again indicated that interest rate cuts could be implemented as early as June, earlier than the U.S. Federal Reserve (Fed). If this happens, it will mark the first pivot (policy shift) among the Group of Seven (G7) countries, including the U.S. and the U.K.
ECB Officials Forecast Rate Cut in June
Olli Rehn, ECB Executive Board member and Governor of the Bank of Finland, stated in a conference speech on the 27th (local time), "Inflation in Europe is steadily moving towards the 2% price stability target," adding, "The time has come to ease monetary policy and start cutting interest rates in June." The ECB will hold its monetary policy meeting on the 6th of next month.
He explained, "This assumes that the disinflation trend continues and there are no setbacks in geopolitical situations or energy prices," diagnosing that inflation expectations in the Eurozone (20 countries using the euro) are well anchored and labor market pressures are easing. The Eurozone's Consumer Price Index (CPI) inflation rate recorded 2.4% last month, maintaining the 2% range for seven consecutive months. The market estimates that the preliminary May CPI inflation rate, to be released on the 31st, will be around 2.5%.
Philip Lane, ECB Chief Economist, also supported the June rate cut in an interview with major foreign media, saying, "If there are no surprises, the environment is sufficient to remove the historically high restrictive (monetary policy) measures."
Lane assessed that the Eurozone was able to ease inflation faster than other regions such as the U.S. due to the relatively large impact from the energy shock caused by Russia's invasion of Ukraine. He said, "The first step (in starting rate cuts) is a signal that monetary policy has effectively lowered inflation in a timely manner," adding, "In that sense, we have succeeded."
He also predicted that while the ECB must maintain a restrictive monetary policy stance throughout this year, "it may be possible to lower rates somewhat within the restrictive range." This implies that additional cuts could follow after the first rate cut in June.
Regarding the possibility that the ECB cutting rates before the U.S. Fed could lead to a decline in the euro's value and an increase in import goods and service prices, he said, "We will consider exchange rate fluctuations, but there has been almost no movement." He also noted that expectations for Fed rate cuts have retreated, causing U.S. Treasury yields and European long-term bond yields to rise, indicating "additional tightening due to the U.S. situation." Major foreign media added that this means the ECB could further cut the short-term deposit rate to offset this.
Rate Cuts Ahead of the U.S. and U.K.
If the ECB proceeds with a rate cut in June, it will be the first among G7 central banks. Unlike being the last major economy to start tightening, it will be the first to pivot policy. The ECB raised rates ten consecutive times from July 2022 to September last year, then held the key interest rate steady at 4.5% annually, with the deposit rate and marginal lending rate fixed at 4.0% and 4.75% respectively from October last year through April this year. CNBC reported, "The officials' statements released today are consistent with previous ECB officials' tone," adding, "This suggests that the ECB could move faster than the Fed, which leads global monetary policy decisions."
Economists at Bank of America (BoA), led by Claudio Irigoyen, recently noted in an investor memo that "the paths of the Fed and ECB will diverge," forecasting "an ECB rate cut in June." Unlike the ECB, which is on the verge of pivoting, the Fed's rate cut outlook has been pushed back due to strong economic data released last week. Irigoyen said, after reviewing recent Fed officials' remarks and minutes, "A rate cut in the U.S. is currently impossible," and predicted "the rate cut cycles of the ECB and Fed will be very different." Goldman Sachs also delayed its forecast for the Fed's rate cut from July to September.
Meanwhile, the Bank of England (BOE) had been expected to possibly cut rates as early as June, similar to the ECB, but recent inflation data exceeding expectations has pushed pivot hopes to the second half of the year. The Bank of Japan (BOJ), which ended its negative interest rate policy, is considering the option of raising rates. Outside the G7 central banks, the central banks of Switzerland, Sweden, the Czech Republic, and Hungary have already implemented rate cuts.
On Monday, European stock markets closed slightly higher, buoyed by expectations of a June rate cut. The U.K. and U.S. stock markets were closed for Spring Bank Holiday and Memorial Day, respectively.
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