The ECB initiates rate cuts after a long gap

“The ECB avoided any surprises for the markets as it reduced policy rates amid decelerating inflation, which could boost appetite for European fixed income.”

The ECB initiates rate cuts after a long gap

  • As expected, the ECB reduced its policy rates for the first time in the last five years.
  • Slowing inflation allowed the central bank to take this step, but the ECB is likely to be vigilant on price pressures.
  • Given that the ECB acted before the Fed, this temporary divergence may create opportunities in European bonds.

The ECB cut its policy rates in June for the first time in nearly five years, after a similar move by the Bank of Canada. This was in line with expectations as inflation continues to slow towards the ECB’s target. However, Christine Lagarde refrained from committing to future rate cuts and appeared in no rush. In order to decide on future policy easing, we believe the ECB will continue to monitor the trajectory of services inflation and wage growth in the eurozone.

Importantly, the ECB started its monetary easing before the Fed. We see only a limited potential for this divergence. As US inflation continues to fall and the economy slows, even the Fed could be inclined to reduce rates. This slowing inflation paints a potentially attractive picture for bonds.

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