Borrowers in the eurozone and Canada are expected to see some relief from high interest rates this week as the European Central Bank (ECB) and the Bank of Canada (BoC) are likely to lower their benchmark rates following recent drops in inflation.
The ECB is set to announce its policy decision on Thursday, with money markets indicating a 93% probability of a rate cut. The central bank is expected to reduce the rate on its deposit facility, which banks use for overnight deposits with the Eurosystem, from its current record high of 4% to 3.75%.
A poll conducted by Reuters last week, which surveyed 82 economists, unanimously anticipated a rate cut at the June 6 meeting. This expectation follows several hints from ECB policymakers suggesting that a reduction is imminent.
Similarly, the BoC is anticipated to lower borrowing costs on Wednesday, with market pricing indicating an 82% chance of a reduction from 5% to 4.75%. These expectations increased after Canada’s GDP growth for the first quarter of the year fell short of forecasts.
If these rate cuts occur, the ECB and BoC would join the Swiss National Bank, which lowered its rates in March, as some of the first major central banks to ease monetary policy in the current cycle.
However, the future trajectory of interest rates remains uncertain due to concerns about the persistence of inflation. Konstantin Veit, a fund manager at Pimco, commented, “We believe the ECB will cut policy rates by 25 basis points at the June meeting to 3.75% on the deposit facility. However, what will be more interesting is the trajectory beyond June. We doubt the ECB will provide a lot of guidance here and expect it to re-emphasize its meeting-by-meeting approach based on the data flow over the coming months. We think it unlikely that the ECB will commit to any particular rate path.”
Data released last Friday showed that eurozone inflation rose in May for the first time this year, reaching 2.6%. Although this is higher than the ECB’s target of 2%, it is significantly lower than the 6.1% inflation rate recorded in the euro area a year ago.
Analysts at Nomura suggest that this could make the ECB cautious about aggressive rate cuts but still expect multiple reductions over the next 18 months. “For the ECB, we see three 25 basis point rate cuts this year and three next, taking the depo rate down to 2.50%,” Nomura stated in a research note.
In Canada, the annual inflation rate cooled to 2.7% in April, down from 2.9% in March, potentially paving the way for the BoC to ease policy this week. Goldman Sachs analysts noted, “Disinflation is well underway in Canada,” and added, “We therefore expect that the BoC will determine that downward inflation momentum has been sustained and cut its policy rate by 25bp to 4.75% at [the] June meeting.”
Despite a decrease in UK inflation to 2.3% in April, the Bank of England is not expected to cut interest rates at its meeting later this month. The first rate cut in the UK is anticipated in November or December.
