Semafor Signals
European Central Bank cuts interest rates ahead of US Fed
Insights from the Financial Times, The Guardian, BBC, and Bloomberg
The News
The European Central Bank cut interest rates for the first time in nearly five years on Thursday by 0.25%, a decision that it said reflected the improved inflation outlook across the Eurozone.
But the ECB warned inflation is forecast to remain above the 2% target into 2025, and declined to indicate whether there would be further rate cuts when the Bank next meets in July.
The ECB cuts come after Canada snipped its interest rates on Wednesday, to 4.75%, down from 5%. Forecasters expect the US Federal Reserve to cut interest rates in September, Reuters reported.
SIGNALS
Longer-term fiscal problems for the Eurozone remain
European Central Bank president Christine Lagarde was “wise” to keep the organization’s cards close and not commit to any future cuts given recent swings in inflation in the Eurozone and global economic uncertainty, the Financial Times said in an editorial. It’s “clearly far too early,” to make deeper interest rate cuts, one global finance analyst told the Guardian. That said, the ECB’s decision to ease rates “will breathe life into an economy that desperately needs some form of stimulus,” an investment strategist told the BBC. The Eurozone languishes behind the US and China in terms of growth, productivity, and bloated public finances, Bloomberg noted If these issues go unresolved, the region “risks sliding ever further into irrelevance,” the outlet added.
ECB may be keeping a close eye on the US Federal Reserve
The ECB’s decision puts it ahead of the US Federal Reserve, but transatlantic differences in inflation and growth may justify the relative haste, an economist told the Associated Press. But further rate reductions by both the ECB and Bank of Canada “could well be prematurely curtailed” by worries over how the markets will respond if the Fed delays easing, a Bloomberg columnist argued. “The Fed usually takes the lead on rate policy and the ECB will be hesitant to cut twice ahead of the Fed, as this could weaken the euro and send inflation higher,” a market analyst wrote in MarketPulse.
High interest rates stymie investment
The overall increase in interest rates by central banks since 2022 has had a “direct impact” on developing countries’ budgets which peg their debt to the dollar or the euro. Their debt growth rate is now double that of developed countries. One in three developing countries are now spending more on debt-servicing interest payments than on crucial areas like health, education, and climate action, according to a UN report released on Wednesday. Countries that service their debt in dollars have “widely suffered” from higher interest rates, a fellow at the London School of Economics told Al Jazeera, and may face the “one-two” punch of also having their currencies depreciate, campaign group ONE Against Poverty argued. By the same token, lowering interest rates would likely ease developing countries’ debt burden.
