The European Central Bank came back to its cautious approach, waiting to see what will the Federal Reserve do next.
The European Central Bank maintained interest rates steady on Thursday during its July meeting. The move was unanimous among committee members and widely expected by markets. ECB President Christine Lagarde gave little insight as to the committee’s reasons, leaving possible interpretations to markets.
Inflation is still significantly above the target in the Eurozone, coming in at 2.5% year-on-year in June. Core inflation was higher than expected at 2.9%. The ECB aims for a 2% target, which the 20 countries sharing the euro won’t reach until 2026, the bank’s own estimates say.
The Eurozone economy is expected to rise slightly in 2024 at 0.8%, below the forecast for the entire European Union at 1%. In 2025, the Eurozone’s Gross Domestic Product is expected to increase by 1.6%, while the EU’s overall economy should grow by 1.4%.
The European Central Bank looks at economic stimulus after years of stagnation due to the combined effects of the COVID-19 pandemic and Russia’s invasion of Ukraine. The ECB slashed interest rates for the first time since 2019 last June, bringing them to 3.75%.
ECB vs Federal Reserve
The ECB was the biggest central bank to slash interest rates during this cycle. Its closest peer, the US Federal Reserve, is much more cautious and looked at tons of data before drawing a clear rate-cut path.
The interest rate on the US dollar is at its 23-high of 5.25%. Markets widely expected several cuts this year, but sticky inflation and a resilient economy delayed the Fed’s pivot.
Following very positive inflation news in June, the Fed will most likely cut interest rates one time before September. Some analysts already expect a cut in August.
“Compared to the Fed, the ECB may have been the first to cut, but they won’t be the fastest,” Brian Jacobsen, chief economist at Annex Wealth Management, told Reuters. “When the ECB cut last it was a cautious cut, now every meeting is going to be a live meeting where the data will dictate every move."
“When the Fed cuts, it will be a confident cut where even a month or two of bad data won’t take them off their cutting path,” Jacobsen added. “It’s annoying that the Fed is waiting so long to cut, but ultimately it will make for a clearer path.”
Both central banks know the gap between USD and EUR interest rates cannot stay too wide for too long. This would significantly impact trade between the two sides of the Atlantic, something neither the US nor the EU can afford.
