From laggard to first mover: ECB could be first big central bank to cut rates

While Frankfurt, as predicted, kept rates unchanged on Thursday, policymakers signalled the possibility of a rate cut at their next meeting in June

In July 2022, the European Central Bank (ECB) was the last of the big central banks (with the exception of the Bank of Japan) to start raising interest rates in the face of surging inflation.

Record energy prices had driven inflation across the euro zone to 8.6 per cent (it would peak at 10.6 in October) and Frankfurt was facing fierce criticism for being slow to act. It would go on to increase interest rates a further nine times, the fastest and biggest hike in interest rates ever undertaken by the bank.

Fast forward 21 months and it now looks increasingly likely that the ECB may be the first of the world’s big central banks to start cutting rates, a reflection of the divergent inflationary paths now opening up between Europe and the United States.

On Wednesday, it emerged that US inflation had accelerated to 3.5 per cent in March, higher than forecast, leading financial markets to anticipate that the Federal Reserve would now delay cutting interest rates until September. In contrast, euro zone inflation fell to a lower-than-anticipated 2.4 per cent in March.


While ECB policymakers, as predicted, kept rates unchanged at their meeting on Thursday, their official policy announcement explicitly mentioned the possibility of cutting rates for the first time in the current cycle. This was seen as almost locking in a rate cut at its next meeting in June.

“Without being triumphant, and without celebrating anything yet, what we are observing is a decline of inflation, a disinflationary process that is in progress,” ECB chief Christine Lagarde said.

However, she stuck to her line that any future rate decision would be “data dependent”. The potential spanner in the works is wage growth, which is currently running at 4.6 per cent well above the 3 per cent level that Frankfurt considers to be in harmony with its 2 per cent inflation target.

Lagarde made it clear that first-quarter wage data, due out in late May, and updated ECB staff projections would inform the ECB’s June decision.

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Markets expect Frankfurt to implement a sequence of rate cuts in the second half of 2024, two or three or even possibly four but to proceed with caution. That could mean incremental 0.25 per cent cuts. All of which could amount to a 0.75 or 1 per cent decline in rates by Christmas, partial relief for tracker mortgage holders here.

Lagarde’s press conference in Frankfurt coincided with a warning from the head of International Monetary Fund (IMF) Kristalina Georgieva that central banks should resist the temptation to cut interest rate cuts too early and that high inflation across advanced economies was “not fully defeated”.

Several analysts are still predicting a possible sting in the tail for inflation, pointing to volatility in commodity markets particularly oil, so the outlook could change.