On June 6, local time, the European Central Bank announced a 25 basis point interest rate cut.

Specifically, the ECB announced that the main refinancing rate, the marginal lending rate and the deposit facility rate will be cut by 25 basis points to 4.25%, 4.5% and 3.75%, respectively, which is the first rate cut by the ECB since raising the benchmark interest rate to a record high of 4.5% in September 2023, which is also in line with consensus market expectations.

In addition, Eurostat reported that inflation in the eurozone was 2.6% in May, the first increase this year. Bank of Italy President Fabio Panetta said that rising inflation was "neither good nor bad", while Bank of Portugal President Mario Centeno said that expectations of rising inflation "are not significantly high" and would not prevent the ECB from starting to cut interest rates. However, investors expect the ECB to take a more cautious approach to rate cuts for the rest of the year.

The eurozone economy continues to be sluggish

According to the data, in 2023, the eurozone economy will grow by only 0.5%, compared with a 0.1% quarter-on-quarter decline and a year-on-year increase of 0.1% in the fourth quarter of last year; In the first quarter of this year, the eurozone economy grew by 0.4% year-on-year and 0.3% quarter-on-quarter, which was better than expected, but still at a low level and not completely free from the threat of "stagflation".

In particular, Germany, one of the engines of the European economy, experienced negative growth last year. According to the data, Germany's GDP (price-adjusted) fell by 0.3% year-on-year in 2023, making it one of the worst-performing major economies in the world. In the opinion of industry analysts, this could lead to an overall slowdown in the European economic recovery.

The ECB's 25bp rate cut is seen as the start of an easing cycle, but the next rate cut may still have to wait months. The data shows that since September 2023, inflation in Europe has fallen sharply, by more than 2.5 percentage points, and inflation expectations have been reduced across the board. Despite good progress in recent quarters, price and wage pressures remain high in the eurozone, and inflation is likely to exceed target next year.

Will the ECB cut interest rates before the end of the year?

At present, the market expects the ECB to cut interest rates at most two more times before the end of the year, and the next rate cut may occur in September.

Dean Turner, chief economist for the eurozone at UBS Wealth Management Turner also said: "The upward revision [of the ECB] to inflation forecasts is expected because inflation has been a bit higher than the market expects. As far as the timing of the next rate cut is concerned, I expect it to be in September. ”

Refinitiv data also showed that the market expects the ECB to cut interest rates by another 40 basis points by the end of the year. However, as the European Central Bank has raised its future inflation expectations, there is still uncertainty about the subsequent interest rate cuts, and it is likely to be a small step, which remains to be further observed.

Interest rate cuts are good for global capital markets

The ECB's rate cut comes on the heels of a number of central banks: Switzerland, Sweden and Canada have already cut rates by 25 basis points on March 21, May 8 and June 5, respectively. On 5 June, the Bank of Canada announced that it would cut its benchmark interest rate by 25bp to 4.75%, becoming the first G7 country to cut interest rates.

What's more, the overall tone of the Bank of Canada is more dovish and easing. Bank of Canada Governor Macklem said that if inflation continues to ease, it would be reasonable to expect further rate cuts, and interest rate decisions will be made on a meeting-by-meeting basis.

Constrained by inflationary pressures, the ECB's hawkish rate cut looks a bit reluctant, but it is still a milestone. As one of the major advanced economies, the impact of interest rate cuts in the eurozone on global markets is significant, which may mark the beginning of a new round of global monetary easing cycle.

After the ECB cuts rates, the Fed may also cut rates in September or December. In the future, advanced economies will gradually bid farewell to the high interest rate environment caused by the worst inflation in nearly four decades.

The interest rate cuts by many central banks will improve the market's expectations for global monetary policy easing, which is beneficial to the global capital market and will also help reduce the constraints on China's monetary policy easing.