The European Central Bank a step away from cutting interest rates?

15.07.2019 15:55|Daniel Kostecki

The subject of monetary policy easing in the eurozone has already become a reality, and it all started in the central banking forum in Sintra, Portugal in mid-June. In a moment, a month will pass from this event, and further opinions appear on the market about ECB actions.

Let us remind you that the slowdown in the euro zone economy is deeper and longer lasting than it was assumed by the President of the ECB, Mario Draghi, before the holidays. Initially, he thought that the slowdown will be temporary, and inflation will return to the target in the medium term. Meanwhile, neither the slowdown is temporary nor inflation is about to rise quickly. This meant that in mid-June Mario Draghi stated that if the prospects did not improve, then economic stimulation would be needed again, and the ECB's toolkit also allowed the possibility of cutting interest rates.

The European Central Bank will have a meeting on 25 July. Let's see what the latest expectations of financial institutions for the coming months regarding the ECB's monetary policy are. According to the latest note, Societe Generale expects the ECB to lower the deposit rate by 10 basis points in September, after the introduction of further risk factors to its forecasts at the meeting next week. Societe Generale predicts that the ECB will reduce the deposit rate by 20 basis points and the refinancing rate by 10 basis points in June 2020. Moreover, the central bank will launch the QE program in the amount of EUR 40 billion a month for one year. This is due to the recession in the US, which will deepen the slowdown in Europe - says SocGen.

Meanwhile, UBS expects the ECB to change its forecasts at the next meeting and cut interest rates twice as high as 10 basis points in September and December. The hurdle facing a new QE program now seems much lower than just four weeks ago, but UBS does not think that the asset purchase program will be re-introduced. QE may appear if the outlook for growth and inflation in the euro area deteriorate even more or if the Fed will ease monetary policy more than currently expected - adds UBS.

How can this all affect the markets? Access to cheaper money may lead to a continuation of the bull market in the stock exchanges in both Europe and the US, while the currency market may affect the lower volatility, for example, the EUR/USD pair.

 

Daniel Kostecki, Chief Analyst Conotoxia Ltd.

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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