On: June 12, 2024 In: Blog, Fixed Income, Knowledge Centre

7 June 2024

European Central Bank (ECB)

  • European Central Bank (ECB) cut rates for the first time since 2019, delivering a 25bps rate cut on its deposit facility, marginal lending facility and main refinancing operations to 3.75%, 4.50% and 4.25% respectively. This was no surprise to the markets given ECB’s guidance of “moderating the degree of policy restriction” leading up to this meeting. As such, consequent “sell on news” price action was observed in major Eurozone (German, Italian, Spanish) government 10-year bonds, with yields edging up 6 – 7 bps on average.
  • ECB statement sees inflation staying well above 2% target into 2025 and revised its 2024 core inflation forecast higher to 2.8% from 2.6% (Mar’24 forecast), citing elevated wage growth as the cause of price pressure. However, a slight optimism was seen in the growth outlook for 2024 being revised higher to 0.9% from 0.6% (Mar’24 forecast).
  • Lagarde’s speech emphasized the avoidance of “pre-committed” rate path by being “data-dependent” and taking “meeting-by-meeting” approach to rate decisions, tamping down likelihood of consecutive cuts in the July meeting. Other key takeaways include emphasis of wage growth as an important factor to watch while echoing the growth outlook optimism in the earlier ECB statement being underpinned by rising real incomes and jobs growth in the near term.

Opus View

  • Rate trajectory bias towards downside. ECB’s rate cut is in line with the recent easing started by some of its G10 peers, namely Bank of Canada and Riksbank (Sweden), which also cut their policy rates by 25bps on Wednesday and on 8 May’24 respectively following the first move from the Swiss National Bank. Despite some recent concerns surrounding the re-acceleration of services inflation (May’24: 4.1% from Apr’24: 3.7%), it seems that ECB is inclined to support growth in a trade-off to achieving their inflation target by this year. It is likely because the impact of their restrictive monetary policy weighing on their economy is larger and transmitted faster given that variable rate bank loans make up the bulk of European corporate debt funding, unlike the US, where corporates rely more on bond market funding with fixed rate coupons. Hence, this prompts the ECB to act ahead of the Fed. Having said that, we see the next potential 25bps cut happening in the September ECB meeting where projections are done with more data available.

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