ECB decision to cut interest rate may weaken the euro
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The European Central Bank (ECB) could open the door to a weaker euro on Thursday as its first interest-rate cut of the cycle puts the region on a divergent policy path from the US.
With a quarter-point reduction all but certain, officials will finally embrace a widening in the difference between borrowing costs on either side of the Atlantic, the implications of which they’ve discussed for months.
ECB policymakers led by president Christine Lagarde have insisted they’re comfortable ploughing a separate furrow from the Federal Reserve, even if that risks a weaker currency that could stoke inflation.
How tolerant officials will be is likely to loom large in their debate on further possible easing — even more so after recent reports hinted at lingering consumer-price pressures. Most recently, data on Friday featured an underlying inflation gauge that unexpectedly rose in May for the first time in a year.
The ECB can already see how diverging policy prospects have begun to impact global markets. The euro has fallen to its weakest level against the pound in almost two years on the view that the Bank of England will lag the ECB in lowering rates.
Bank of Italy governor Fabio Panetta acknowledged on Friday that cutting borrowing costs poses a currency risk to prices, but added that tight US policy could also hurt global demand and thereby curb eurozone inflation.
His Austrian colleague Robert Holzmann recently sounded more ominous, acknowledging that “the Fed with the dollar is, figuratively speaking, the gorilla in the room” for officials.
Thursday’s decision will include quarterly forecasts that will be scrutinised for hints of future policy intentions, as will Ms Lagarde’s press conference. Money markets for now are betting on two reductions in total this year, with a small chance of a third.
Denmark’s central bank is likely to match the ECB move with a quarter-point cut of its own just hours after the eurozone outcome.
Elsewhere, US payrolls and a suspenseful Canadian decision on a possible rate cut will be among highlights in the coming week.
- Bloomberg