The danger of premature ECB rate cuts

WITH inflation in the eurozone dropping from a peak of 10.6 per cent in October 2022 to 2.6 per cent in May 2024, the European Central Bank (ECB) is optimistic that inflationary pressures will continue to ease.

Its March projections show inflation averaging 2.3 per cent in 2024, before falling to 2 per cent in 2025 and 1.9 per cent in 2026. Thus, the ECB is expected to cut its key policy rate, the deposit facility rate, from 4 per cent to around 3.75 per cent on Thursday (Jun 6).

Markets foresee this as the first of many cuts that will substantially lower the ECB’s policy rates over the next two years. The signalling effect and timing of the move are indeed significant, because this marks only the fifth time since the ECB’s inception (26 years ago) that it has initiated a new rate-cut cycle.