A new rate cut for the euro is expected to be considered by the ECB in October following the FED which cut its interest rates by half a point last Wednesday. The announcements of J. Powell pave the way for the ECB to proceed with a second cut in euro interest rates by 0.25 basis points, authoritative European sources with knowledge of the data will consider at the next meeting of the Central Bank in Frankfurt, note.
The data
The data is as follows:
First, the extent of the cut announced in US interest rates, along with predictions that the FED will continue on the same line (albeit with smaller rates of reduction) in order to avoid a recession in the US economy. Although J. Powell explained that the pace of dollar interest rate cuts in the coming period will not be the same, markets have every reason to expect that the FED will have cut interest rates by another 0.75 basis points by the end of the year.
Secondly, the positive developments on the inflation front in the eurozone which is following, albeit modestly, a steady downward trend. At the same time, as can be seen from the data, the European economy shows recovery tendencies from the stagnation of the previous year. “The ECB, with its interest rate hikes in previous years, succeeded in reducing inflation without causing a recession in the eurozone,” the same European sources characteristically point out, discounting further interest rate cuts in the coming months.
Third, the need to prevent a dramatic devaluation of the euro against the dollar, which would hurt the competitiveness of European products at a time when Europe is trying to accelerate its growth pace. It is worth noting that the European GDP depends on international trade at a rate of more than 50%. This percentage in the USA is 27%, while that of China moves at a similar level. At a time when eurozone countries are under unprecedented pressure from the onslaught of cheaper Chinese products, an appreciation of the euro would be a major negative development.
Based on these data, authoritative observers predict that the ECB will continue in the coming months, albeit at a moderate pace, to reduce euro interest rates, taking into account developments on the inflation front. What is certain, however, is that the current interest rate cycle is not going to drive the cost of money to pre-pandemic levels. The geopolitical turmoil brought about by Russia’s invasion of Ukraine, the unknown duration of this war, as well as the conflict in the Middle East, portends continued economic turmoil, so monetary authorities will remain very cautious in their moves going forward.
Source: APE – MEB
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