ECB on track to cut interest rates next week, top bank officials suggest

The European Central Bank could start cutting interest rates as early as its June 6 meeting, the bank’s chief economist Philip Lane said in an interview with the Financial Times. “Barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction,” Lane said. A cut would make the ECB the first major central bank to loosen monetary policy after raising rites almost three years ago to tamp down inflation.

AND- Finland’s central bank governor is also suggesting the cut will come in June. Olli Rehn, who also sits on the ECB’s governing council, said yesterday that inflation is falling across the Eurozone “in a sustained way,” meaning “the time is thus ripe in June to ease the monetary policy stance and start cutting rates.” He flagged geopolitics and oil prices as risks to that forecast.

Don’t expect the ECB to go nuts: While rate cuts are on the cards, interest rates will need to stay high enough to keep a lid on inflation, Lane suggested. “Things will be bumpy and gradual. The best way to frame the debate this year is that we still need to be restrictive all year long,” he said.

The trigger: Eurozone inflation registered 2.4% in April, down from a peak of over 10% in October 2022, inching closer to the bank’s 2% target. Cooling inflation data have led investors to pencil in a 25 bps cut for the benchmark deposit rate at next week’s meeting, the FT reports.

When can we expect rates to normalize? “Under the baseline forecasts, next year, when we expect wages to have visibly decelerated, when some of the base effects of fiscal measures which are pushing up inflation this year have faded out, then there will be a discussion about normalization,” Lane said.

Uh, Enterprise? What does that mean in plain English? Lane is suggesting the ECB is watching for two things on the inflation front before more aggressively cutting rates: For wages to grow at a slower pace next year — and for economies to fully adjust to the phase-out of energy subsidies and tax cuts. The subsidies and tax cuts were designed to shield consumers from high energy prices after Russia’s invasion of Ukraine and to ease the bite of inflation. They were in place throughout 2023 and are being phased out in much of the Eurozone this year.

Remember: The ECB held rates steady at its last policy meeting in April, keeping the deposit rate at a record 4% that’s been in place since September.

WHAT TO WATCH for later this week: Friday’s release of US core personal consumption expenditures, a key gauge watched by the Fed.

ALSO WORTH NOTING THIS MORNING-

• Yeah, but can you Grok it? Elon Musk’s AI startup xAI has raised USD 6 bn in a series B round that values it at USD 24 bn. The funding will help bring the company’s first products to the market, build advanced infrastructure, and ramp up the development of future technologies. Saudi’s Alwaleed bin Talal and his Kingdom Holding — long shareholders of Twitter / X — participated in the round. (Reuters)
• China rolls out its largest chip fund: The Chinese government has launched its third fund to support the semiconductors industry. The CNY 344 bn (USD 47.5 bn) fund will help government efforts to reach self-sufficiency in semiconductors. (Reuters)

MARKETS THIS MORNING-

Asian markets are mixed this morning, with the Nikkei and Shanghai Composite both starting the day in the red, while the Kospi and Hang Seng are basically flat. Traders seem to have welcomed the ECB’s remarks as they look forward to a shorter trading week in the US and UK, where futures were up in overnight trading. European futures are also up at dispatch time.

SOUND SMART- Why do equities traders care about interest rates? Lower rates mean lower returns for investors in debt, resulting in more money in the hands of businesses and consumers. As debt yields decrease, some investors will shift back into stocks in search of better returns, even though stocks are generally more volatile than debt.

THE CLOSING BELL-

The EGX30 fell 0.9% at yesterday’s close on turnover of EGP 3.4 bn (30.4% below the 90-day average). Foreign investors were net buyers. The index is up 9.6% YTD.

In the green: Juhayna Food Industries (+4.8%), Eipico (+4.7%), and Delta Sugar (+4.3%).

In the red: Sidi Kerir Petrochemicals (-5.6%), Mopco (-3.4%), and Palm Hills Development (-3.2%).