The European Central Bank will likely cut rates in June after GDP and inflation data confirm it’s the right moment to do so.
Gross Domestic Product in the European Union grew by 0.3% in the first quarter of 2024, beating market expectations. This leads the 27-country economic bloc outside its technical recession, with GDP falling by 0.1% in the last two quarters of 2023.
The Eurozone also expanded by 0.3% thanks to the better-than-expected performances of its four largest economies. GDP in Germany and France grew by 0.2%, with Italy and Spain trailing behind with 0.3% and 0.7% growth respectively.
Sweden was the only Eurozone country to contract in Q1, with GDP declining by 0.1%. Among the smaller economies, Ireland had the best quarter with 1.1% growth after months of recession and Austria had the lowest GDP growth at 0.2%.
“This morning’s confirmation of quarterly growth in the first quarter has put an end to a short-lived recession in the Eurozone, with the economy having turned a corner since the beginning of 2024,” managing economist at the Centre for Economics and Business Research Sam Miley said.
Miley added that prospects for 2024 look rosy, with the European Central Bank forecasting a 0.6% economic expansion this year and 1.5% in 2025.
Inflation and interest rates
In a separate report by Eurostat, inflation in the 20 countries sharing the euro remained stable at 2.4%, in line with market expectations. This marks the 7th month in a row with prices below 3%.
Inflation declined faster than expected even though Europe was hit harder by the energy crisis than the United States, where inflation remains rampant.
The ECB raised interest rates to a record-high 4% last year, which is what led inflation to slow down and the economy to contract. The European Central Bank expects inflation to reach the 2% target by 2025.
Markets forecast the first cut in interest rates next June. This will likely stray the ECB away from the American Federal Reserve, where rates will likely remain stable until the year’s second half. Usually, the ECB acts after the Federal Reserve, but European officials see no reason for a further delay.
What happens after June, however, is an open question. Austria’s central bank governor Robert Holzmann predicts a long pause after June, watching how the economy reacts to the first cut.
Holzmann is also worried about an increase in oil prices, especially as tensions in the Middle East mount.
“While a June rate cut is considered by many market participants to be almost a done deal, there is still plenty room for debate about the pace of ECB policy moves later in the year,” FX strategist at Rabobank Jane Foley said.
