The European Central Bank (ECB) is gearing up to lower interest rates in the upcoming month. However, it is crucial to maintain a restrictive policy throughout this year due to the slow normalization of wage growth, which is not expected until 2026.
The ECB has all but confirmed a rate cut on June 6, leading to discussions about future moves. Predictions are now leaning towards just one more cut for the rest of the year. ECB’s chief economist, Philip Lane, mentioned that unless there are significant surprises, the current economic conditions warrant a slight easing of restrictions.
Policymakers will consider policy normalization next year if wage growth slows down significantly. The ECB’s first few cuts aim at removing restrictions with the current deposit rate at 4%. The economy will not be stimulated by these cuts until the deposit rate falls below 3%. The key wage indicator showed an increase last week. The ECB’s path of interest rates for the remainder of 2024 still remains uncertain. Despite the rapid rise in service prices, there is a downward trend in inflation, indicating the possibility of further rate cuts post-June.
However, the markets’ anticipations for subsequent moves are less clear. Some expect a pause in July, while others predict a resumption of reductions in September. The ECB’s upcoming rate adjustment in June coincides with a backdrop of potentially increased inflation in May.
Most of the time, lowering interest rates by the ECB results in reduced cost of borrowing. This prompts individuals and businesses to increase spending. Consequently, European products may become more affordable for international buyers which will foster economic growth. In contrast, saving money becomes less lucrative due to lower interest rates, leading to a potential rise in stock market prices.
