The European Central Bank is almost certain to cut interest rates from their record highs on Thursday, likely recognizing progress in tackling high inflation while stressing that the work is not yet complete.
ECB officials have expressed their intention to lower borrowing costs after inflation in the 20-nation eurozone dropped from over 10% at the end of 2022 to just above its 2% target in recent months.
This overall decline is considered sufficient for the ECB to start winding down the most aggressive round of interest rate hikes in its history, which was initiated in response to skyrocketing prices following Russia's invasion of Ukraine.
The ECB will now join the central banks of Canada, Sweden, and Switzerland in cutting rates, moving ahead of the US Federal Reserve in this regard.
However, what seemed like the beginning of a significant easing cycle a few weeks ago now appears more uncertain, given signs that eurozone inflation may be more resilient than expected, similar to the situation in the US.
This suggests that ECB President Christine Lagarde and her colleagues will likely refrain from further rate cuts at or beyond the July meeting. Instead, they will emphasize that any future actions will depend on incoming data and that borrowing costs must stay high enough to control inflation.
All 82 economists polled by Reuters expect the ECB to cut its deposit rate to 3.75% on Thursday from a record 4.0%, marking its first cut since 2019. However, not everyone believes this is a wise decision.
ECB chief economist Philip R. Lane said last week that rate cuts would not be a "declaration of victory" and that the pace of further cuts would depend on the progress of domestic inflation and demand.
Most economists still anticipate two more rate cuts by the end of the year, with money markets forecasting one or two additional cuts, possibly in September and December. However, stronger-than-expected data over the past few weeks has raised concerns about a tougher path to 2% inflation than the ECB had projected, a point frequently emphasized by influential board member Isabel Schnabel.
Eurozone inflation rose more than expected in May, driven by increasing prices in the services sector. Some policymakers noted this as particularly significant since it reflects domestic demand, with inflation rising to 4.1% from an initial estimate of 3.7%.
Surveys of economic activity also indicate a stronger-than-expected economic recovery following more than a year of stagnation, which is likely to compel the ECB to raise its GDP forecast for this year.
They are still expected to predict a return of inflation to the ECB's 2% target next year, which would keep the central bank on track for further policy easing, barring any additional inflation surprises.
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