Commerzbank : Economic Briefing 06.06.2024 ECB – what the premature rate cut means

Economic Research

Economic Briefing

ECB - what the premature rate cut means

After the widely expected rate cut of 25 basis points, the ECB said little concrete today about the further development of interest rates. President Lagarde repeatedly stressed that everything depends on the data. We continue to expect the ECB deposit rate to fall from the current 3.75% to 3.0% by the first quarter of 2025. After that, we do not expect any further rate cuts because the inflation problem is unlikely to be solved for a long time yet. Ultimately, today's rate cut is premature.

As expected, the ECB cut its key interest rates by 25 basis points today. The deposit rate now stands at 3.75%. In its statement, the ECB justified this move by stating that it is now more confident that inflation will return to its inflation target of 2% in the medium term.

During the press conference, investors focussed on finding out what could happen next with policy rates. ECB President Lagarde repeatedly said that future rate decisions depend on the data. In particular, she referred to the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

No rate cut cycle

In our opinion, future interest rate decisions will depend primarily on inflation and wage data. We remain cautious here. Due to the recent strong rise in wages, inflation is likely to stabilise at 3% rather than 2% at the end of the year - especially as the decline in goods inflation (excluding energy and food) is largely over. It should also be borne in mind that the ECB Governing Council is dominated by doves. It is therefore likely to be many months before the ECB admits that the inflation problem is far from being solved. We continue to expect further rate cuts of 25 basis points in each of the next three quarters, which would put the ECB deposit rate at 3.0% at the beginning of next year. After that, we do not see any further interest rate cuts. So we cannot speak of a real rate cut cycle.

A premature rate cut

We think it is premature that the ECB has already cut interest rates today. Unfortunately, it had pre-committed on this interest rate cut instead of orientating itself primarily on the data, which in the overall view suggests a wait-and-see attitude. Excluding the volatile prices for energy and food, consumer prices have been rising more strongly again since the beginning of the year - at an annualised rate of 3.5 percent, which is well above the ECB's inflation target (chart). Furthermore, there is still no sign of a downward trend in the rise of the eurozone index of contractual wages. And the latest wage deals are still somewhat above the rise in the wage index. Moreover, the leading economic indicators

6 June 2024
Dr. Jörg Krämer
Table of contents
No rate cut cycle	1
A premature rate cut	1

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Economic Briefing Chief Economist

Economic Research

have been rising significantly for several months. This increases the risk that companies will have more pricing power again later in the year.

Compared to other central banks, the ECB was late in raising interest rates in 2022 and is now one of the first to lower them. In the end, this reaction function is an important argument for us as to why inflation should be well above 2% in the coming years.

Table 1 - ECB raises 2024/25 inflation forecasts

ECB experts' June projections; in parentheses: ECB March projection; growth and inflation rates in percent

	2024	2025	2026
GDP growth	0.9 (0.6)	1.4 (1.5)	1.6 (1.6)
Inflation	2.5 (2.3)	2.2 (2.0)	1.9 (1.9)
Core rate	2.8 (2.6)	2.2 (2.1)	2.0 (2.0)

Source: ECB, Commerzbank Research

Chart 1 - Consumer prices have risen more strongly recently

Consumer prices excluding energy, food, alcohol and tobacco, seasonally adjusted, 3-months and 6-months rates, in percent

annualized
7
6
5
4
3
2
1
0
-1
-2
2020	2021	2022	2023	2024
		3-months	6-months

Source: ECB, Commerzbank Research

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Economic Briefing Chief Economist

Economic Research

Analysts

Dr. Jörg Krämer

Chief Economist

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