ECB, towards interest rate cut in June: “doves” pressing


By John

ECB rate cut increasingly likely in June, with the confirmation that several members of the Governing Council were pushing for a reduction in the cost of borrowing already in the April meeting. From the “minutes”, the summary report of that meeting, it emerges that the members of the Governing Council considered a rate cut in June “plausible” if further data confirmed the inflation prospects indicated in the March forecasts.

«Broad consensus – says the document – on the fact that it is prudent to wait for the next monetary policy meeting to have enough confidence in a return to the inflation target. In the meantime, inflation in April was confirmed at 2.4%, as in the previous month, stopping a downward trend. As chief economist Philip Lane recently explained, a “bumpy” trend must be taken into account. And above all, it continues “core” inflation, excluding energy and food, fell: 3.1% in February, 2.9% in March, 2.7% in April. Cut in June, therefore, even if among the thousand uncertainties (especially geopolitical) “no commitment” on the path of rates for the rest of the year. From the minutes it emerges, however, that the pressure of several “dove” governors is becoming more intense. If on the one hand market rates are easing – Bank of Italy data say that those on mortgages in March were 4.21% from 4.31% in February – on the other, even by cutting in June, rates from the current record will remain at restrictive territory for some time yet. And “the reduction of the Eurosystem's balance sheet is having a restrictive effect on the economy.”

Better to run the risk of cutting early than to risk inflation expectations ending up moving away from the 2% target downwards to the detriment of growth. This is why several governors already last month “were sufficiently confident” that they could cut immediately.