Indrė Genytė-Pikčienė. After the cut in June, the ECB will not touch interest rates until autumn | Business

In June, as expected, the base interest rates were cut by 25 basis points to 3.75 percent. Those assessing the further monetary policy situation rsurvey data of inka participants (conducted by both Bloomberg and ZEW Mannheim) show that the ECB will cut the base interest rates a couple more times this year. According to the majority of respondents, the closest decisions to reduce interest rates should take place in September and December, when the Governing Council of the ECB will have more data describing the macroeconomic situation and forecasts for the coming periods.

The start of interest rate cuts sends a clear message that the tipping point for interest rates has passed and interest rates will gradually decline as the wave of inflation that the ECB sought to contain with high interest rates has subsided. The annual inflation of the euro zone reached 2.5 percent in June. and was more than half lower than observed a year ago.

True, the rhetoric of the representatives of the central bank remains cautious: annual inflation indicators are still relatively high and are in no hurry to stabilize at the ECB’s target of 2 percent. level. The base annual inflation rate (excluding the prices of food and energy carriers) also remains higher than the monetary policymakers would like. However, central bank specialists are most worried regarding service inflation, which exceeded 4 percent in both May and June.

Services inflation is characterized by the highest stickiness and wage-inflation spiral phenomena. Inflationary processes affect the expectations of labor market participants and activate salary renegotiation processes, while the growth of labor costs significantly affects the dynamics of service prices. Due to the risks posed by this vicious cycle, further inflationary trends will continue to be closely watched and the emergence of new unexpected hotbeds of inflation will be responded to by delaying or even raising interest rates once more.

The base interest rates set by the ECB directly affect the interest rates of a wide range of financial instruments: EURIBOR, respectively, interest rates on loans and deposits, yields on government securities and other debt securities, and returns on other asset classes. Therefore, the initiated cycle of monetary policy easing, cutting interest rates, will affect both borrowing and savings markets.

The window of high interest rates for savings financial products is closing, but as credit resources increase, consumer appetite and demand from investment and export markets will gradually recover. In the long run, this will raise the pulse of the Eurozone economy.

Financial market participants had already counted on the first cut of the base interest rates in June. How interest rates move in the future will depend on both the number of key rate cuts and the size of those steps. Two more ECB moves of 25 basis points each are expected this year. However, the opinions of the surveyed market participants differ as to how the dynamics of interest rates will look next year.

Euro short-term interest rate futures curves for today indicate that interest rates will reach around 3.35 percent at the end of this year and 2.5 percent at the end of next year. However, it is necessary to emphasize that the future expectations of market participants react both to new macroeconomic data and to the rhetoric of ECB Governing Council members, so when new circumstances arise, they are taken into account and the curves move accordingly.