It is very likely that the European Central Bank will cut the interest rates during the nearest monetary policy meeting taking place on the 12th of September. There are several factors that could guide us this way in our expectations.
Yes, the annual inflation in July increased in comparison to June by 0.1 percentage point but for future development of the price level we cannot rely on annual data. It is obsolete. We have to be focused on the monthly inflation rate, which was zero in July in the Euro area. Even the inflation remains sticky in services where prices grew by 1.2 percent on the monthly basis.
The other factor that speaks for the September cut of interest rate is the economic development of Germany as the biggest economy within the EU. German GDP decreased in the second quarter on the annual and quarterly basis. There were only two countries in the EU that recorded an economic decline in comparison to the previous year and previous quarter – Germany and Latvia. It is in the interest of the entire Euro area and EU economy that Germany would return to the economic growth as soon as possible, so the monetary policy may help.
The third factor what would probably make the Governing Council of ECB cut the interest rates is the uncertainty about the development in the US. According to the last jobs report the unemployment rate rose by 0.2 percentage point to 4.3 percent in July. The number of unemployed people increased by 352,000 t o7.2 million.
What more the Bureau of Labor Statistics (BLS) adjusted the employment data which suggests that there were 818,000 fewer jobs in March of this year than were initially reported. When spread through the prior year, the average monthly job gain from April 2023 through March 2024 was 173,500 versus nearly 242,000, an analysis of BLS data shows.
Finally, the question is to what extent we can expect ECB cuts interest rates in the rest of this year. It is very likely that the ECB would be very cautious, and it would try to find the balance between boosting the economy on one hand, and not allowing the inflation to rebound on the other hand.
So, we can expect the cut by 0.25 percentage point in September, and maybe another such cut in December. [1] But this expectation is based on the current level of knowledge and information about the relevant variables. We are still living in the environment of high uncertainties related to the geopolitical issues, especially the conflict in Ukraine and the Gaza strip.
[1] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.
