Richard Drury
Written by Seema Shah, Chief Global Strategist
The European Central Bank’s 25 basis point interest rate cut, ahead of the Federal Reserve, highlights the difference in the post-coronavirus economic recovery between the euro zone and the United States.
With the growth of the euro area With inflation slowing and falling from its peak, the ECB’s proactive stance is justified. However, this divergence could pressure the euro and reignite inflationary fears – we expect future ECB cuts will likely be in line with the Fed’s timetable.
European Central Bank versus Fed interest rate path
1991 to present
source: Bloomberg, Prime Asset Management. Forecasts are the main asset management forecasts. Data as of June 7, 2024.
On Thursday, the European Central Bank announced a 25 basis point cut in interest rates. In contrast, the Federal Reserve is scheduled to keep interest rates unchanged at its meeting this month.
Normally, central banks wait for the Fed to do this Cut interest rates before you move. In fact, until yesterday, the ECB had never cut interest rates before the Fed. But with the eurozone suffering significantly weaker post-Covid-19 growth results than the US, and headline inflation in the eurozone falling from a peak of 10.6% to 2.6%, the ECB had a strong reason not to wait for the Fed.
However, the ECB will be wary of its divergent policy path. The widening gap between US and eurozone interest rates threatens to put downward pressure on the euro, which in turn increases inflationary pressures – a dynamic that the ECB should fear.
Although the fight against inflation in the Eurozone has been impressive, the latest inflation and wages data surprised to the upside. Further depreciation of the euro would add to growing fears that inflation in the eurozone may stall.
This requires a degree of coordination at the global policy level. The ECB is likely to cut interest rates next in September and December – the same months in which the Fed is likely to cut interest rates. However, if the Fed delays the start of its easing cycle until early 2025, the ECB’s next move could be delayed just as much. A longer rise in the United States means a longer rise in Europe.
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Editor’s note: The summary points for this article were selected by Seeking Alpha editors.
