The European Central Bank (ECB) is poised to make a significant move on Thursday with its first interest rate cut of the cycle, potentially leading to a weaker euro. This decision will set the ECB on a different policy path from the US, where borrowing costs remain divergent.
In Frankfurt, Germany, the ECB headquarters will witness a quarter-point reduction, a move that has been anticipated for some time. This shift marks a departure from the Federal Reserve’s stance, a change ECB officials, led by President Christine Lagarde, have been preparing for months. They remain confident in pursuing a distinct policy direction despite potential risks of a weaker currency, which could fuel inflation.
ECB officials led by President Christine Lagarde have insisted they’re comfortable plowing a separate furrow from the Federal Reserve, even if that risks a weaker currency that could stoke inflation.
The ECB’s debate on further easing measures will be closely watched, especially after recent reports indicated persistent consumer price pressures. On Friday, data revealed an unexpected rise in the underlying inflation gauge for May, the first increase in a year. This divergence in policy prospects is already impacting global markets, with the euro dropping to its weakest level against the pound in nearly two years, reflecting expectations that the Bank of England will not follow the ECB in cutting rates soon.
According to Bloomberg Economics, the ECB is expected to cut rates by 25 basis points in June, with further reductions likely in September, October, and December. Bank of Italy Governor Fabio Panetta acknowledged the potential currency risk but noted that the US’s tight policy could also dampen global demand, thus curbing euro-area inflation. Austrian policymaker Robert Holzmann emphasized the significant influence of the Federal Reserve’s decisions.
Thursday’s announcement will include quarterly forecasts, providing insight into future policy intentions. Markets are currently betting on two rate cuts this year, with a slight chance of a third. The ECB’s decision will likely be mirrored by Denmark’s central bank, which is expected to cut rates by a quarter-point shortly after the eurozone decision.
Bank of Italy Governor Fabio Panetta acknowledged on Friday that cutting borrowing costs poses a currency risk to prices, but added that tight US policy could also hurt global demand and thereby curb euro-area inflation.
This week also features significant economic events in the US and Canada. The US is set to release payroll data, while the Bank of Canada is expected to consider a rate cut amid recent disinflationary trends and slower-than-expected economic growth. Analysts predict a 25-basis point cut on Wednesday, though some uncertainty remains about the timing of this decision.
