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PrintTop Economist Says ECB Will Kickstart Global Rate Cuts, Warns Investors Of Increased Volatility In Coming Months
BY Benzinga | ECONOMIC | 09/12/24 04:54 AM EDTThe European Central Bank will likely kickstart coordinated rate cuts by global central banks, said an economist, as he weighed in on the implications of the move.
Rate Cuts Back? ECB’s Governing Council is scheduled to announce its interest rate decision at 8:15 a.m. EDT following a meeting held in Frankfurt on Thursday. The announcement will be via a monetary policy statement and ECB President Christian Lagarde will host a press conference at 8:45 a.m. EDT.
After cutting rates by 25 basis points in June, the ECB held fire in its July meeting to assess the impact. The central bank said that the September move would be data-dependent.
The deposit rate facility, which is the interest institutions receive on their overnight deposits at the central bank, is expected to be reduced from 3.75% to 3.50%.
The interest rate on main refinancing operations, which determines the amount that credit institutions pay the ECB when borrowing for one week, is expected to be trimmed from 4.25% to 3.65%. The marginal lending facility, which is the rate credit institutions pay the ECB when they borrow money overnight, is currently at 4.50%.
Flash harmonized index of consumer price inflation released by Eurostat in late August showed a decline in the annual rate from 2.6% in July to 2.2% in August, which marked a three-year low. The core rate just ticked down from 2.9% to 2.8%, suggesting stickiness in the metric. Economic growth in the region has remained uninspiring, with Germany, the biggest economy in the 27-nation bloc sharing the euro as the common currency, reporting a slight sequential contraction, on a price, seasonality and calendar-adjusted basis, in the second quarter.
US To Follow Suit: LPL Financial’s Chief Economist Jeffrey Roach said in a recent note, that as far as the U.S. Federal Reserve is concerned, it’s not a question of “if” but “how much.” The most likely scenario is the Fed will cut by 25 basis points in the upcoming meeting and reserve the potential for more aggressive action later this year if the job market deteriorates further, he said.
The economist also cautioned investors to expect interest rate volatility as the Fed adjusts policy.
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“We expect the ECB to lower rates by a quarter of a percent as they coordinate a global easing cycle with the Fed and most other central banks,” Roach said.
Among other G-7 central banks, the Bank of England’s rate decision is due on Sept. 19. Earlier this month, the Bank of Canada lowered rates by 25 basis points to 4.25%. When the Bank of Japan is set to hold its two-day monetary policy meeting on Sept. 19-20, it is widely expected to stay pat after two hikes earlier this year.
LPL’s Roach also weighed in on the recent dis-inversion in the spread between two and 10-year U.S. Treasury notes, which raised talks regarding a potential recession. He sees the development as the result of early signs of slowing economic growth putting downward pressure on yields, expectations of aggressive Fed rate cuts and rising global risks that are driving investors to safe-haven treasuries.
He noted that during the period of dis-inversion in the mid-1990s, the Fed cut rates but the economy did not fall into recession because of growth in real disposable incomes, giving consumers the ability to spend.
LPL said it expects volatility in the bond and equity markets to intensify during this period of global uncertainty and the softer growth outlook. Therefore, it maintained its neutral stance on equities but said it would watch for potential opportunities to add equities on weakness. “We expect volatility to remain elevated over the next few months, and believe a better entry point back into the longer-term bull market will likely emerge,” it added.
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