Natasha May, Global Market Analyst at J.P. Morgan Asset Management (JPMAM), has shared her thoughts on yesterday’s ECB interest rate cut.
“The ECB chose continuity, sticking with their tried-and-tested formula of a 25-basis point rate cut accompanied by little to no guidance about the future policy path. This might appear a sensible strategy, given huge uncertainty about future global trade relations. But considering the economic backdrop, there is no need for the ECB to be so hesitant.
Wherever tariff rates settle, most members of the ECB’s Governing Council seem to agree that trade tensions will weigh more on eurozone activity – and therefore medium-term inflation – than they will directly boost prices. This implies the ECB should take rates below its estimate of a 1.75 to 2.25% neutral range, especially given near-term deflationary pressures stemming from a stronger euro and lower energy costs.
“And services prices – to date the stickiest component of eurozone inflation – are showing encouraging signs of deceleration, as lower wage growth feeds through into consumer prices. June’s policy meeting will be accompanied by new staff forecasts that are likely to project lower growth and inflation over the next few years. President Lagarde should take that opportunity to signal that the path for eurozone rates remains downward.”
