Recent ECB Developments Give Confidence to the Market! Will the ECB Cut Rates?


Eurozone inflation is still on track to return to 2% next year, undermining expectations that European Central Bank policymakers are likely to start cutting interest rates from their June highs based on reports of their April meeting on Friday.

The ECB left interest rates unchanged last month but signaled clearly that the next step would be to start cutting interest rates provided wages and inflation data continue on their current relatively good track.

Policymakers appeared so bullish on future prospects that they issued some signals to begin easing in April, a proposal that was nevertheless rejected by a majority of policymakers.

Speaking in the weeks since the April meeting, policymakers have confirmed that a cut on June 6 is almost certain but a rate cut after that is still under discussion, taking into account inflation uncertainty and the delay by the US Federal Reserve on their rate cuts.

Most policymakers think that June will not be a single rate cut, although the timing of further action should not be determined in advance, giving policymakers flexibility in making sudden changes depending on economic conditions.

Markets now see up to three interest rate cuts this year, or two after June, most likely in September and December, when the ECB also publishes new economic projections.

Eurozone inflation remained steady at 2.4% last month and is expected to remain at this level for the rest of the year before returning to the ECB's 2% target in 2025.

Policymakers stressed throughout the report that the incoming data would confirm the bank's projections, which boosted the ECB's confidence in the quality of forecasts after several turbulent years when these figures were widely missed.

Although the ECB has publicly announced that policy does not depend on Fed measures, the decisions taken by the world's largest central bank affect financing conditions worldwide, limiting the ECB's independence as widening rate differentials weaken the euro and increase imported inflation.