ECB – the double rate cut

The ECB is likely to cut the deposit rate by 25 basis points in the coming week.

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Dr. Jörg Krämer, Dr. Ralph Solveen

Commerzbank Economic Research

09/06/2024

It is even likely to cut the main refinancing rate by 60 basis points in order to reduce the spread between the two rates and thus keep volatility on the money markets low. Communication is likely to be a balancing act, as some doves in the Council would probably like to see a back-to-back rate cut in October in view of the economic risks, while other Council members would prefer to proceed with caution. We expect three further rate cuts in December, March and June and are therefore more conservative than the market.

The double rate cut in September

An interest rate cut by the ECB next week should come as no surprise to anyone. Markets have already fully priced in such a move, and all analysts surveyed by Bloomberg expect it. Firstly, inflation fell significantly from 2.6% to 2.2% in August. Even if this was largely due to lower energy prices, the ECB is likely to see this as a positive sign. Secondly, according to ECB data, collective wages in the eurozone rose by 3.6% in the second quarter, which was noticeably slower than in the previous five quarters, when they had risen by more than 4% and in some cases even by just under 5%. Thirdly, some members of the ECB's Governing Council are becoming increasingly concerned about the weak economy. To summarize, the governor of the Banque de France, Villeroy de Galhau, recently stated in an interview : “It would be fair and wise to decide on a further rate cut.” In this respect, the deposit rate is likely to fall by 25 basis points to 3.50%.

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