ECB set to press ahead with rate cut next week thanks to German inflation reading

  • ECB interest rate cut next week ‘almost guaranteed’ after German CPI data
  • Markets expect 50-75bps of cuts this year but analysts warn of uncertainty  

The European Central Bank is expected to push ahead with its first interest rate cut in June despite signs inflation is yet to be defeated.

A flash estimate published on Wednesday shows German consumer price inflation  was 2.4 per cent year-on-year in May, up from 2.2 per cent in April, owing to higher services inflation.

But the all-important measure of core inflation, which excludes energy and food costs, was stable at 3 per cent for the month despite expectations of a slight jump.

And, barring any major shocks from EU-wide inflation data due on Friday, analysts say prospects of the ECB leapfrogging both the US Federal Reserve and Bank of England with its fist interest rate cut next week look all but confirmed.

ECB president Christine Lagarde expected to pull the trigger on first cut next week 

UBS said: ‘The signals that emerged from the ECB meeting on 11 April and subsequent public remarks by ECB officials have been clear: The ECB is on track to cut rates by 25 basis points (bps) to 3.75 per cent in the upcoming meeting on 6 June.’

The bank expects the EU’s May headline inflation figure will ‘rise temporarily’ owing to higher energy inflation, forecasting a 2.5 per cent year-on-year inflation figure for the month.

It added: ‘[But] even disappointing May inflation data…would not stop the ECB.’

Felix Feather, economist at asset manager Abrdn, agreed next week’s rate cut ‘is almost guaranteed’.

While markets are confident of next week’s cut, there is far less certainty about the ECB’s policy outlook for the remainder of this year amid concerns about sticky inflationary pressures and the potential impact of decoupling with US policy.

Feather said: ‘Services inflation and wage growth data remain too hot for back-to-back cuts in June and July, so this could be a ‘hawkish cut’.

‘An uptick in the headline rate is widely expected but it would have to be extremely large to knock the ECB off course for a June cut.

‘However, what happens to core service inflation will be key to setting expectations for the ECB path beyond June. The recent strength in labour cost growth could mean that services inflation strengthens, leaving the ECB on hold for a period after the initial cut.’

Eurozone inflation struggles to return to the ECB's 2% target

Eurozone inflation struggles to return to the ECB’s 2% target 

Current market pricing suggests the ECB will cut its key interest rate by 25bps two or three times by year-end, bringing it to between 3.25 and 3.5 per cent.

Carsten Brzeski, global head of macro at ING, said: ‘It appears to be a question of pace not whether the ECB will remove more restrictiveness.

‘The risk of reflation has clearly increased…[while] the cyclical rebound in economic activity as well as structural labour shortages and upward pressure on wages could easily put the ECB’s own inflation projections at risk.

‘The question of whether next week’s rate cut will fall into the category of ‘one is none’ or ‘one and done’ will remain unanswered but one thing is clear: a longer substantial rate-cut cycle will only materialise if inflation quickly returns to 2 per cent.

‘Any signs of reflation and also stronger economic activity would limit the ECB’s room for manoeuvre.’

The ECB and BoE are expected to begin cutting interest rates this summer

The ECB and BoE are expected to begin cutting interest rates this summer