ECB will take the lead in reducing interest rates
The European Central Bank (ECB) is expected to make its first interest rate cut at its meeting on Thursday this week after completing the tightening cycle.
While the Fed gives the message that it will keep interest rates high until it gets more evidence that inflation in the USA is moving towards the target, it is predicted that the ECB’s interest rate cut may have a downward effect on the euro.
With the ECB reducing interest rates by 25 basis points each, the difference between Eurozone and US interest rates will widen.
ECB officials, led by President Christine Lagarde, emphasize that they are comfortable diverging from the Fed, even if there is a risk of a weaker currency that could trigger inflation. Whether the easing steps will continue after the June discount, which is almost certain, and at what pace they will proceed will depend on the data. Data announced on Friday revealed that consumer prices in the Eurozone exceeded expectations by 2.6 percent on an annual basis in May.
While the Governor of the Bank of Italy, Fabio Panetta, acknowledged on Friday that lowering borrowing costs poses an exchange rate risk on prices, he stated that tight US policy could also harm global demand and therefore curb Eurozone inflation.
“Our data and decisions are naturally influenced to some extent by the Fed,” said his Austrian counterpart Robert Holzmann.
Bloomberg Economics predicts a 25 basis point cut in June and further cuts of the same size in September, October and December, after keeping the interest rate constant in July.