The ECB Pulls the Trigger

Following the earlier lead of its Canadian and European counterparts (Switzerland and Sweden), the European Central Bank (ECB) clipped its key policy rate this week, ploughing a different furrow from the Federal Reserve.

The widely telegraphed move by the ECB marked its first cut since September 2019. Continued disinflation in the eurozone (from a peak of 10.6% in October 2022 to 2.6% in May 2024) was judged by the ECB as enough to begin easing.

The 450 basis point increase in ECB policy rates between July 2022 and September 2023 helped bring prices under better control. Energy and food disinflation have made large contributions to progress, but core price increases have halved from a peak rate of 5.7% year over year to 2.9% at present. The breadth of inflation is more moderate in the eurozone than elsewhere. About 27% of the items in the euro area’s consumer price basket have been rising by more than 4% (annualized) in the past six months, compared to 49% in the neighboring U.K. and 37% in the U.S.

There are lingering concerns over elevated wages and service prices. But forward-looking indicators such as Indeed job postings and the ECB's wage agreement tracker are all pointing towards further moderation in pay gains. Demand in the eurozone remains tepid; economic growth remains sluggish following two years of stagnation. Though activity improved in the first quarter, the divergence in performance among member states persists. A restrictive monetary policy stance is contributing to tight credit standards and weak demand for loans.

In the wake of the decision, the question arises: where will the ECB go from here? At her post-meeting press conference, President Christine Lagarde did not commit to a specific interest rate path, choosing to maintain a “data-dependent and meeting-by-meeting approach.”