On Thursday, June 6, the European Central Bank announced a 25 basis-point rate cut, the first time in 2019. Following Canada, this makes the European Central Bank the second central bank among G7 member countries to announce a rate cut.
The Wall Street Journal reported that the European Central Bank is reversing its historic trend of raising interest rates and widening the policy gap with the Federal Reserve. However, the Federal Reserve is not expected to follow suit with a rate cut in the next few months.
The European Central Bank stated that it would lower the benchmark interest rate from 4% to 3.75%. In a statement, the European Central Bank noted that future rate decisions would be based on subsequent economic data, and the rate-setting committee did not commit to a specific rate path in advance.
This move may indicate that a consecutive rate cut in July is less likely. Traders are maintaining expectations for further rate cuts by the European Central Bank, foreseeing a total cut of 40 basis points later this year.
Nevertheless, the rate cut by the European Central Bank marks a significant moment for investors and the global economy. It signifies a turning point in recent monetary policy.
The rate cut could potentially lead the European Central Bank and the Federal Reserve onto different paths, widening the existing borrowing cost gap between the United States and Europe. While this may stimulate short-term economic growth in Europe, it could also complicate the work of policymakers, especially in Europe.
Recent economic data shows that Europe is facing many of the same difficult inflation pressures in wages and services as the United States. The eurozone’s core inflation rate, excluding volatile food and energy prices, rose from 2.7% in April to 2.9% in May. In the United States, the core inflation rate dropped to 3.6% in April.
The European Central Bank noted in its statement that although the inflation rate has decreased, wage growth remains high, and inflation is likely to stay above the 2% target level “next year.” Simultaneously, the European Central Bank raised its inflation forecasts for 2024 and 2025.
Childe-Freeman, Chief G10 Foreign Exchange Strategist in London, remarked that the European Central Bank’s choice not to commit to a specific path in advance and to increase inflation expectations for 2024–2025 gives a hawkish impression, which supports a bullish outlook on the euro against the dollar.
Following the European Central Bank’s rate cut announcement, the euro-dollar exchange rate saw a short-term rise of about 20 points, currently at 1.0883.