Eurozone Inflation at 1.9% in May
Below ECB Target
Two More Rate Cuts Expected This Year
As the European Central Bank (ECB) is expected to cut its key interest rate this week, market attention is turning to the future direction of its monetary policy.
According to market research firm London Stock Exchange Group (LSEG), there is a 99% chance that the ECB will lower its key interest rate by 0.25 percentage points at its monetary policy meeting scheduled for the 5th (local time). If the rate cut is implemented, the deposit rate will fall to 2% per year. This is half the peak of 4% reached in mid-2023.
The Financial Times (FT) reported, "Such a rate cut marks a turning point from the policy stance that had raised rates at an unprecedented pace for 15 months," adding, "At that time, the ECB sharply increased rates to curb soaring prices caused by supply chain disruptions and the impact of Russia's invasion of Ukraine."
The strong likelihood of an ECB rate cut is due to both price stabilization and sluggish economic recovery being observed at the same time. The preliminary Eurozone Consumer Price Index (CPI) for May rose 1.9% year-on-year, approaching the ECB's inflation target of 2%, but during the same period, Eurozone Gross Domestic Product (GDP) increased by only 0.3%.
There is also speculation that the ECB may cut rates further within this year. Capital Economics raised the possibility of an additional cut in July, while Barclays predicted two further 0.25 percentage point cuts in September and December, respectively. However, both placed more weight on the likelihood of a rate hold during the summer months.
Bank of America (BOA) Global Research also stated, "There are fewer and fewer reasons for the ECB not to lower rates below 2%," supporting the possibility of further easing.
However, there are also projections that the ECB is unlikely to give a clear signal regarding its future policy path. This is because external factors, such as the tariff policies of the Trump administration, could still act as variables. Europe faces many factors to consider, including the possibility of EU retaliation against tariff policies by U.S. President Donald Trump, changes in Germany's fiscal policy, and increases in defense spending within Europe.
CNBC reported, "The Eurozone economy still faces uncertainty, making it unclear what direction the ECB will take with its monetary policy after this week."
The ECB is also expected to release its internal economic outlook at this meeting. The Organisation for Economic Co-operation and Development (OECD) has forecast Eurozone growth at 1% and inflation at 2.2% for this year.
With this rate cut, the ECB is expected to re-enter an easing cycle for the first time in over two years. However, the timing and likelihood of further cuts are still expected to be decided cautiously amid ongoing domestic and external uncertainties.
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