La Française: This is it! A 25 bp rate cut in June and a gradual step ahead

La Française: This is it! A 25 bp rate cut in June and a gradual step ahead

June 5, 2024

Interest Rates ECB
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As widely anticipated by the Governing Council (GC) members, the European Central Bank (ECB) will lower its policy rates at next week’s meeting, while proceeding cautiously with further easing beyond June.

The new ECB staff macroeconomic projections are expected to reflect stronger growth this year, with an inflation profile remaining broadly unchanged, aiming for a 2% target by 2025.

Here’s what we anticipate:

  • The ECB is expected to unanimously reduce its key interest rates by 25 basis points (bp), setting the deposit rate at 3.75%, the refinancing rate at 4.25%, and the marginal lending facility rate at 4.50%. ECB officials are now sufficiently confident in the disinflationary trend in the euro area to begin cutting interest rates. However, we do not believe there is significant consensus for a second similar rate cut in July.
  • President Christine Lagarde is likely to reiterate that monetary decisions will remain data-dependent, allowing for flexibility in the monetary policy stance in the coming months.
  • Compared to the March projections, we expect GDP growth to be revised upward in 2024, from 0.6% to 0.8%, while remaining broadly unchanged for the following two years at 1.5% in 2025 and 1.6% in 2026. Regarding prices, we anticipate that both the headline HICP (Harmonised Index of Consumer Prices) and underlying inflation (excluding energy and food) will be similar to the March forecasts, with both converging to the 2% target next year.

To sum up, since the April meeting, ECB officials have confirmed that the next move will be a rate cut, but the path beyond that remains uncertain due to the risk of inflation volatility and the improved Eurozone outlook. In this context, we expect the GC will likely reduce monetary policy restrictiveness gradually over the coming months. Although this meeting might be a non-event from a market perspective, we believe that once policy easing begins, European interest rates at the front end of the yield curve will decline.

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