Morning Market Brief: June 7, 2024

ECB starts lowering rates?

The European Central Bank (ECB) held its June meeting where it elected to lower its policy interest rate. The ECB becomes the second major central bank to begin lowering interest rates after the Bank of Canada did so on Wednesday. The move might provide some support for Europe's economy, which has struggled over the past several quarters.?

• The ECB reduced its key interest rate by 25 basis points to 4.25%. This marked its first rate cut since 2016, which took its rate to 0.00%, where it stood until 2022. The ECB then undertook an aggressive campaign to lift interest rates in an effort to soften elevated inflationary pressures.
• Europe’s central bank believes the rate cut was warranted in response to an improving outlook for inflation. Additionally, the economy needs some support after weakening in recent quarters.
• Still, the ECB believes price pressures remain elevated, which will require policy to remain relatively restrictive. In its revised outlook, the ECB projects inflation of 2.5% in 2024 and 2.2% in 2025, which would be above its 2% target. The central bank expects growth to pick up this year, aided in part by the potential stimulus from lowering its interest rates.
• ECB President Christine Lagarde said there was a likelihood of more rate cuts this year. However, she did not provide any timing on more cuts, rather saying that the ECB will carefully monitor economic data and, in particular, inflation.

Two central banks started lowering interest rates this week. Up next are decisions from the US Federal Reserve Board (Fed) and Bank of England. The Fed appears poised to hold steady at this meeting with the economy proving more resilient and inflation still well above target. However, there is a strong likelihood the Fed will begin cutting rates this year. It is likely these major economies will see lower rates by the end of 2024.

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