Today, the financial market is focusing on the monetary policy direction of the European Central Bank, and a rate cut is almost certain. Ronald Temple, the chief market strategist at Lazard Asset Management, pointed out that the continuous downward trend of inflation in the eurozone, coupled with the dovish remarks long held by officials of the European Central Bank, makes it highly likely that the European Central Bank will announce an interest rate cut this Thursday (June 5th).
Judging from the inflation data, the inflation situation in the Eurozone has undergone significant changes. Recently, the inflation rates in major eurozone countries such as Germany, Spain, Italy and France have all declined. Germany’s CPI rose by 2.1% year-on-year in May, lower than 2.2% in April. Spain dropped from 2.2% in April to 1.9% in May. Italy slightly decreased from 2.0% to 1.9%. France dropped from 0.9% to 0.6%. These data comprehensively reflect that the overall inflation rate in the Eurozone is gradually approaching the 2% target set by the European Central Bank. Even some economists predict that it may be close to or lower than this target level. The continuous cooling of inflation provides an important basis for the European Central Bank to implement interest rate cuts.
Meanwhile, the European Central Bank previously defined the interest rate range of 1.75%-2.25% as a neutral monetary policy level. In the current economic environment, if this key viewpoint changes, it will undoubtedly bring a huge shock to the market. However, as of now, the market has not yet captured the relevant adjustment signals.
It is worth noting that changes in the external trade environment have had a significant impact on the decision-making of the European Central Bank. The United States has adopted a more aggressive trade stance towards the European Union, a trend that has cast a shadow over the economic outlook of Europe. Against this backdrop, Ronald Temple predicts that by the end of this year, the interest rate of the European Central Bank is expected to drop to 1.5%. Although the money market, based on LSEG data, indicates that the interest rate is expected to be around 1.70% by the end of the year, slightly higher than strategists’ predictions, market expectations for further interest rate cuts by the European Central Bank remain strong.
Previously, the European Central Bank has repeatedly adjusted interest rates to address economic challenges. Over the past year, in order to stabilize economic growth and control inflation, the European Central Bank has frequently employed monetary policy tools, and its pace of interest rate cuts has drawn much attention from the market. Once this interest rate cut is implemented, it will be another significant measure in a series of policy adjustments by the European Central Bank, and it also indicates that it will continue to use monetary policy means to deal with the current complex economic situation.
To sum up, given the decline in inflation in the eurozone and the pressure from the external trade environment, the European Central Bank has decided to cut interest rates today, and the possibility of further rate cuts in the future should not be underestimated. Subsequently, the market will closely monitor the policy direction of the European Central Bank after its interest rate decision and the statements of relevant officials to assess the future path of European monetary policy.
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