Eurozone: ECB begins to loosen policy brakes
EUR unchanged; Firm JPY ahead of BOJ.
Group Research - Econs, Radhika Rao7 Jun 2024
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The European Central Bank delivered on the well-telegraphed 25bp cut on Thursday, taking the deposit rate to 3.75% from a record 4%. This was characterised as a step to “moderate the degree of monetary policy restriction after nine months of holding rates steady” rather than to defend growth/ recession risks. Moreover, this also marks a departure from the past for moving at a different beat from the US Fed, with the timing of the latter’s start of rate cut cycle still uncertain at this juncture. Guidance was non-committal, with plans to keep policy conditions “sufficiently restrictive for as long as necessary”, aimed at anchoring near and medium-term inflationary expectations.

Quarterly staff projections backed the decision to not commit to a set policy path. ECB staff raised their annual average headline inflation outlook for 2024 to 2.5% from 2.3% previously and 2025 to 2.2% from 2%. The 2026 projection remained at 1.9%. Economic growth is expected to pick up to 0.9% (DBSf 0.8%) in 2024 vs 0.5% in 2023, 1.4% (DBSf 1.2%) in 2025 and 1.6% in 2026. The year-to-date momentum backs the upward revision in inflation forecasts. In the first five months of the year, HICP inflation has averaged 2.6% vs 5.5% last year, with core down at 3% 5MY24 vs 5% in 2023. There is likely to be some unease in the Governing Council on premature rate cuts, as core inflation ticked up in May from 2.7% yoy to 2.9% alongside the recent increase in wage growth and positive momentum in activity indicators. Assuming growth gradually returns to its potential rate and headline inflation inches back towards the target, we retain our call for a modest cut each in 3Q and 4Q, when quarterly staff projections are released. The bar to go slow on the policy easing is nonetheless low, especially if the inflation surprises to the upside on any exogenous supply shocks or on strong wage growth, risks of which are contained at this stage.

Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]

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