It is almost certain that the European Central Bank will cut interest rates by 25 basis points at its next meeting on June 6. The focus of the press conference is likely to be on what happens in the coming months.
It is unlikely that President Christine Lagarde will explicitly signal another move in July, but she may give a slight nod to more action in September. The financial markets have fully priced in a reduction in June and one more before the end of the year.
The members of the ECB's Governing Council haven't left many surprises for June - even the "hawks" have indicated that a cut is very likely. The debate has moved on to July and we don't think Lagarde will take sides publicly any time soon.
Lagarde is likely to present a picture of price pressures being reduced by the slowdown in wage and profit growth. She is likely to downplay the acceleration in negotiated wage growth in 1Q24 shown by the ECB's official time series.
Inflation is slowing, boosting real incomes, and PMIs are rising without putting pressure on wages - so GDP growth is likely to continue accelerating in 2Q24. This will allow the European Central Bank to start cutting interest rates in June and should allow the Governing Council to continue cutting interest rates in the second half of the year.
With regard to the Composite PMI, the main reading rose to 52.3 in May, from 51.7 in April, beating the median forecast of economists surveyed by Bloomberg News of an increase to 52.0. The average of 52.0 in the last two survey periods is above the average of 49.2 from January to March. This suggests that GDP growth is accelerating in 2Q24 and is consistent with the 0.2% expansion of the economy in this quarter.
The pace of inflation slowed in May and was the weakest since November 2023. A slower increase in services prices was partially offset by a weaker decline in industrial sector selling prices. We expect HICP inflation to slow to 2.4% in 2Q24, from 2.6% in 1Q24, and we believe it will fall below the ECB's 2% target this summer.
Eurozone GDP grew by 0.3% in 1Q24. Falling inflation should continue to reduce pressure on real household incomes, supporting consumer spending. And as the ECB cuts interest rates, this should boost sentiment and investment. We expect GDP growth to expand by 0.2% in 2Q24 and continue to gain momentum until the end of the year. The economists on the ECB team predict the same result for this quarter.
The slowdown in inflation should allow the ECB to act cautiously. We expect the European monetary authority to make 3 more interest rate cuts after July.
The short-term outlook remains very positive for the EU economy.
Inflation is slowing, boosting real incomes, and PMIs are rising without putting pressure on wages - so GDP growth is likely to continue accelerating in 2Q24. This will allow the European Central Bank to start cutting interest rates in June and should allow the Governing Council to continue cutting interest rates in the second half of the year.Despite the improvement in inflation and economic activity in Europe in recent months, the ECB's faster pace of interest rate cuts compared to the Fed's are likely to push up yield differentials and weaken the euro. The widening gap between yields lines up with expectations for diverging monetary policies in the US and euro area. Consensus forecasts see the Fed cutting rates by 50 bps by the end of 2024, while the ECB is predicted to cut its deposit rate by 85 bps.
