The European Central Bank (ECB) is set to cut borrowing costs for the euro area for the first time since September 2019, marking the official end of the record fast-hiking cycle that began after the Covid-19 pandemic as inflation soared. The move comes as Eurozone inflation has fallen, putting pressure on the region's weak economy. However, this could weaken the euro while higher US interest rates tighten financial conditions globally.
ECB President Christine Lagarde is expected to address a press conference following the governing council meeting in Frankfurt am Main on April 11, 2024. Negotiated wage growth reaccelerated in the first quarter to 4.7%, and Eurozone inflation for May came in slightly higher than expected with headline inflation at 2.6% and core at 2.9%. However, some analysts have questioned the reliability of these figures due to one-off effects such as mild winter weather boosting Q1 outdoor construction and one-off payments raising wages more than usual in some countries.
ECB board member Isabel Schnabel has cautioned against moving too quickly on interest rate cuts and avoiding cutting them too fast. The ECB's move could have strong implications for the euro-dollar exchange rate, which feeds into inflation via the prices for imported goods and services. Some analysts believe that a divergence between the ECB and US Federal Reserve's (Fed) own rate setting is not unusual and reflects two different economic situations.
The ECB is expected to lower its key interest rate from 4% to 3.75%, outpacing the Fed in terms of rate cuts. This could weaken the euro, while higher interest rates in the US continue to tighten financial conditions there and in other countries due to the global role of the dollar.
The ECB's move comes as European Central Bank officials are signaling an end to Europe's inflation crisis. However, policymakers are likely entering a 'shallower for shorter' phase, where cuts are staggered and rates remain above prepandemic levels due to sticky inflation. The futures market sees one Fed rate cut before Election Day, probably in September.
Investors will watch to see how the ECB's move influences monetary policy beyond Brussels and its effect on global trade, stock markets, and the dollar.
