Candriam: Don’t cry victory too soon! We know the direction, but not the speed

Candriam: Don’t cry victory too soon! We know the direction, but not the speed

7 juni 2024

Rente ECB
Rente

Comment by Nicolas Forest, CIO of Candriam.

Despite higher inflation projections, the ECB has decided to join 'the rate cut club', cutting by 25 bp to 3.75%. It’s the fourth bank among G10, after SNB, Riksbank and Bank of Canada to start its easing cycle.

This marks a significant difference with the past as the ECB is moving ahead of the Fed, which appears to be more patient, awaiting more convincing data indicating that inflation is decelerating towards its target. Powell is expected to reiterate next week that monetary policy is sufficiently restrictive and requires more time to work. However, positive signs are emerging as economic activity seems to be moderating and labor market tensions are easing.

Don’t cry victory too soon! Lagarde doesn’t want to pre-commit further cuts. She is taking a gradual and cautious approach like the other central banks and will reassess the situation meeting by meeting. The speed and the timing will depend on inflation data. Nonetheless, we expect two more rate cuts before the end of the year, starting in September, as temporary inflation effects in services should disappear.

At the same time the ECB has raised inflation forecast for 2024 and 2025, implying that this initial cut may not signal the start of a sustained easing cycle. On the contrary, the new guidance remains cautious, avoiding any clear direction on future moves.

This first cut could continue to support European equities especially small and mid-caps given the favourable macro backdrop.

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