The ECB cut rates yesterday, and the number of central banks starting to trim rates – after more than two years of rises – is growing. However, economists and fund managers don't think the ECB is going to rush into more cuts, given the stickiness of inflation and a need to avoid a repeat of past problems.

Yesterday, the European Central Bank cut its main interest rate by 0.25 per cent, or 25 basis points, to 3.75 per cent – the first such cut in five years. Gradually, as inflation data hopefully shows a weakening of price pressures – a big “if” – central banks such as the US Federal Reserve, Swiss National Bank and Bank of England will also act. 

Here is a selection of comments from wealth managers, banks and fund houses.

Julian Howard, lead investment director, Multi-Asset Solutions (London), GAM Investments
Today's decision by the ECB to reduce the deposit rate was almost a foregone conclusion. But in the weeks running up to the decision, the context for a rate cut had been getting increasingly challenging. Inflation in Europe has not been on a neat downward trajectory, echoing the same awkward policy and credibility dilemma faced by the Federal Reserve in the US.

While the drivers for persistent inflation on both sides of the Atlantic have differed up to now (fiscal stimulus in the US, energy prices in Europe), there are signs that they are now converging. Given that US inflation historically tends to lead European inflation, it is perhaps unsurprising that the more recent inflation data in the eurozone started to see strength in services prices and to an extent, wages too.

The investment implication is that the eurozone is not about to embark on a rapid monetary easing cycle and so it may be worth thinking about which areas of the market could thrive best in a scenario where firmer growth co-exists with stubborn inflation and relatively high rates.

Europe's banks have been on a tear of late, but it should also be remembered that Europe does not have the kind of all-weather technology stocks in the US index which appear almost indifferent to the rapidly evolving inflation and rates narrative.

Daniele Antonucci, chief investment officer at Quintet Private Bank (parent of Brown Shipley)
That the European Central Bank cut interest rates today isn’t a surprise. After all, this was widely pre-announced by the central bankers.

The latest inflation figures caused the market to doubt somewhat that the inflation-easing trend had continued, perhaps the European Central Bank’s ability to cut rates.

However, we doubt this is the case. Our view is that the inflation progress is just slowing. One of our 2024 outlook views was that inflation would slow to just above central banks’ targets. This is what’s happening in the eurozone.

The key piece of information for markets is what President Lagarde will say on the future rate path at the press conference. Any upcoming ECB rate cuts are likely to be a tailwind for consumption and investment and, therefore, economic growth.

This is one reason why we’ve recently added to European equities to our tactical asset allocation, given the better growth prospects.

Konstantin Veit, portfolio manager at PIMCO
While the ECB has lowered its cruising altitude somewhat, the data flow over the coming months will decide the speed at which the ECB removes additional restrictiveness.

Given the ECB’s reaction function, we envision the ECB to keep cutting rates at staff projection meetings. September provides the next opportunity to holistically reassess the disinflation process.

Contrary to earlier this year, market pricing seems reasonable and broadly in line with our long-held baseline of three cuts for this year. We expect additional cuts in September and December. Risks are skewed towards fewer cuts, mainly on the back of sticky services inflation, a resilient labour market, loose financial conditions and ECB risk management considerations.

Nicolas Forest, chief investment officer at Candriam
Despite higher inflation projections, the ECB has decided to join “the rate cut club,” cutting by 25 bps to 3.75 per cent.  It’s the fourth bank among G10, after SNB, Riskbank and Bank of Canada, to start its easing cycle.

This marks a significant difference with the past as the ECB is moving ahead of the Fed, which appears to be more patient, awaiting more convincing data indicating that inflation is decelerating towards its target. [Jerome] Powell [of the Fed] is expected to reiterate next week that monetary policy is sufficiently restrictive and requires more time to work. However, positive signs are emerging as economic activity seems to be moderating and labour market tensions are easing. 

Don’t cry victory too soon! [ECB President Christine] Lagarde doesn’t want to pre-commit further cuts. She is taking a gradual and cautious approach like the other central banks and will reassess the situation meeting-by-meeting. The speed and the timing will depend on inflation data. Nonetheless, we expect two more rate cuts before the end of the year, starting in September, as temporary inflation effects in services should disappear.

At the same time the ECB has raised the inflation forecast for 2024 and 2025, implying that this initial cut may not signal the start of a sustained easing cycle. On the contrary, the new guidance remains cautious, avoiding any clear direction on future moves.

This first cut could continue to support European equities especially small and mid-caps given the favourable macro backdrop.

Seema Shah, chief global strategist at Principal Asset Management
Although today’s decision was fully anticipated, the market will be pondering the fact that the ECB is cutting policy rates into a cyclical economic upturn. Inflation has descended meaningfully in the past year and inflation expectations are anchored, justifying the decision to reduce policy restrictiveness. 

The ECB navigated the post-Covid inflation spike successfully and is now able to reap the rewards. Yet, the upward revisions to the ECB’s inflation forecast, as well as the recent upside surprises to wage growth and economic activity, do emphasise the need for a cautious approach to future policy decisions. Lagarde will be careful to avoid pre-committing to a future policy path which, in turn, suggests that a July rate cut is very unlikely.

Mark Wall, chief European economist at Deutsche Bank
As expected, the ECB cut rates by 25 bps. But the statement arguably gave less guidance than might have been expected on what comes next. In that sense, the immediate tone is a “hawkish cut.” This is not a central bank in a rush to ease policy.