ECB rate cut: full details
The ECB has slashed its three key interest rates by a quarter of one percentage point today, in its first rate cuts since before the Covid-19 pandemic.
In a statement just released, the ECB explains:
The Governing Council today decided to lower the three key ECB interest rates by 25 basis points.
Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady.
This makes the ECB the first of the Big Three central banks to cut interest rates in the current cycle, and follows cuts by Canada yesterday, Sweden in May and Switzerland in March.
This takes the ECB’s deposit rate down to 3.75%, from the record high of 4% where it has been pegged since last September. The deposit rate was last cut in 2019, before the ECB began raising interest rates in 2022 and 2023 to fight inflation.
The ECB has also lowered the interest rate on the main refinancing operations, which is the rate banks pay when they borrow money from the ECB for one week, from 4.5% to 4.25.
Its third key interest rate, the marginal lending facility, has been lowered from 4.75% to 4.5%.
This means the ECB has cut interest rates ahead of the US Federal Reserve, which is keeping US interest rates at a 23-year high, and the Bank of England, whose Bank rate is a 16-year high.
Key events
Closing post
Time to wrap up…. here are today’s main stories:
Over in the US, meanwhile, layoffs remain low.
The number of Americans filing new claims for jobless support rose last week, to a four-week high of 229,000.
That’s higher than the 219,000 which economists expected, but is still a historically low figure really.
US Weekly Initial Jobless Claims comes out slightly higher at 229k vs 220k, continued claims also higher at 1792k vs 1791k. 10-year yields initially lower but rebounded about 2 bps higher and USD slightly weaker. Market focus now looking towards tomorrow’s non-farm payroll data
— Saxo UK (@SaxoUK) June 6, 2024
Konstantin Veit, portfolio manager at PIMCO, also expects two more interest rate cuts this year – in three, and six, month’s time.
Veir says:
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The European Central Bank (ECB) cut policy rates by 25 basis points, without providing firm guidance beyond June.
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While the ECB has lowered its cruising altitude somewhat, the data flow over the coming months will decide the speed at which the ECB removes additional restrictiveness.
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Given the ECB’s reaction function, we envision the ECB to keep cutting rates at staff projection meetings. September provides the next opportunity to holistically reassess the disinflation process.
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Contrary to earlier this year, market pricing seems reasonable and broadly in line with our long-held baseline of three cuts for this year. We expect additional cuts in September and December.
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Risks are skewed towards less cuts, mainly on the back of sticky services inflation, a resilient labour market, loose financial conditions and ECB risk management considerations.
Today’s eurozone interest rate cut is “one of the best-telegraphed moves in monetary policy history,” says Carsten Brzeski, global head of macro at ING.
That’s a reference to the hints from policymakers in recent weeks that a cut at the June meeting was a done deal (as it proved).
Brzeski predicts that two more rate cuts this year are likely, but cautions that the ECB could be deterred by “negative inflation surprises”.
He says:
The stickiness of inflation has clearly made some ECB members more cautious and reluctant than a few months ago. In an ideal world, in which the eurozone economy does exactly what the ECB macro forecasts expect it to do, namely to grow at potential with inflation slightly below 2%, the ECB will eventually continue with cutting rates.
One rate cut in September and another one in December are the most likely outcomes. However, it wouldn’t take a lot of negative inflation surprises for the ECB to tread more carefully or even reverse today’s cut. With today’s decision, the ECB has slightly loosened the monetary policy breaks.
With more (inflation) roadblocks ahead, it’s clearly far too early to even think about taking the foot off the breaks entirely.
Christine Lagarde was right, it didn’t take long to discover which ECB policymaker voted against today’s interest rate cut.
The lone opponent was Robert Holzmann, the current Governor of Austria’s central bank, Reuters reports, citing three sources.
Unsurprising…
ECB’S HOLZMANN WAS THE LONE DISSENTER IN THURSDAY’S POLICY MEETING — SOURCES
— Samuel Indyk (@seindyk) June 6, 2024
Final question….
Q: French president Emmanual Macron has proposed extending the ECB’s mandate to cover economic growth and climate protection. What’s your view?
Christine Lagarde does not sound keen on this Élysée Palace wheeze.
Lagarde explains that the ECB has a clear mandate already – delivering price stability. That gives ‘solid guideposts and boundaries’ for monetary policy strategy.
The ECB doesn’t see the need, or have the capacity or competence, to change that.
She adds that providing price stability can encourage investment in green technologies and infrastructure.
Q: What is your view about the ECB publishing dot plots (as the Federal Reserve uses to show where policymakers expect interest rates to be in future).
Lagarde says the dot-plot mechanism is “an interesting concept”, but says no more.
And wishing the assembled reporters a “good summer”, that’s the end of the press conference.
ECB decision was not unanimous – one member opposed it
Q: How divided is the ECB’s governing council about the path ahead, and aas today’s decision unanimous?
Christine Lagarde reveals that the decision was not unanimous, and that one member of the governing council opposed it.
She explains:
Was it a unanimous decision? Yes, but for one governor.
She doesn’t disclose who, but later says it shouldn’t be hard for reporters to identify “him”.
Lagarde adds that everyone on the governing council was united that the path was data dependent, and decisions would be taken meeting by meeting. There was “absolutely no dissent on that”, she says.
Lagarde: The next few months will continue to be bumpy
Christine Lagarde then explains that there are ‘bumps on the road’ on the journey to get inflation down to the ECB’s 2% target.
Some are predictable (such as base effects, where an inflation change a year ago affects the rate today), but others can come as a surprise.
Lagarde says:
The next few months will continue to be bumpy, we know that.
Lagarde: strong likelihood we are in the dialling back phase, but data will determine it
Q: Has the ECB entered into a ‘dialling back’ phase, or could today’s cut be ‘one and done’?
Christine Lagarde says she “won’t volunteer” that the ECB is moving into a dialling back phase today.
Decisions are being made based on the ECB’s confidence about the path for inflation, but it needs to see data, and analysis of that data, to confirm the eurozone is on that path, she explains:
As Lagarde puts it, with a wave of her hand (like an umpire signalling a four):
I cannot confirm that it is the dialling process that is underway. There is a strong likelihood, but it will be data-dependent.
Q&A: Lagarde says ECB remembered D-day
Onto questions!
Q: Can you explain why you have cut interest rates while also raising your inflation forecasts – did you precommit to a cut today too early?
Lagarde tries to fend off this bouncer, by explaining that the ECB’s governing council started today’s meeting by paying tribute to those who died on the beaches of Normandy 80 years ago today.
Those sacrifices on D-day allowed Europe to build what we have build since, Lagarde (a former French finance minister) explains.
That’s why there can be “very harmonious and congenial decisions” among 20 nationals representing their national central banks.
Then, we decided to cut, she declares. And it did that, because the ECB’s “confidence in the path ahead” has been increasing in the past months.
She reminds reporters that the ECB tightened policy rapidly between July 2022 and September 2023. Then it entered a holding phase, until today.
In each of those two phases, inflation halved, she explains.
Lagarde explains that the ECB is data-dependent, and will make decisions meeting by meeting.
Q: The market expects 65 basis points of cuts this year – is the market right? [that would imply nearly two more cuts on top of today’s 25 basis points reduction]
Markets do what they have to do, she replies. And the ECB will do what it has to do, too.
Extreme weather events, and the broader climate crisis, could push up food prices and add to inflation, Christine Lagarde explains:
Economic risks ‘balanced in near term’
The risks facing economic growth are balanced in the near term, but remain tilted to the downtide in the medium term, Lagarde cautions.
If there is a weaker world economy, or an escalation in trade tensions between major economies, would weigh on the eurozone economy, she warns.
Russia’s war against Ukraine, and the conflict in the Middle East, are both threats to growth, she adds.
But growth could be higher, if inflation falls faster than expected.
On inflation, Lagarde reminds us that prices rose by 2.6% in the year to May, up from 2.4% in April.
But, she says, food and goods inflation fell, while energy prices rose and services inflation rose markedly. Despite that, most measures of underlying inflation fell.
But “domestic inflation remains high”, Lagarde warns, while wages are still rising at an elevated pace as earnings catch up with the previous surge in inflation.
Looking ahead, there are signs that wage growth will moderate, she adds.
Lagarde then outlines how the eurozone economy is showing some signs of resilience.
After five quarters of stagnation, the eurozone grew by 0.3% in the first quarter of 2024, she tells reporters.
The services sector is expanding, while manufacturing is showing signs of stabilisation at a low level, Lagarde points out.
The ECB expects the economy to continue to recover, as higher wages and improved terms of trade push up real incomes, she adds.
ECB president Christine Lagarde then reads out that the ECB is “determined” to ensure that inflation returns to its 2% medium-term target in a timely manner, and will keep policy rates “sufficiently restrictive” for as long as necessary to achieve this.
And she says slowly, and clearly:
We are not pre-committing to a particular rate path.
