The interest rate turnaround is complete: the European Central Bank (ECB) announced the first interest rate cut for the euro area in almost five years, something the market was eagerly anticipating. As announced, the central bankers reduced the official interest rate by 0.25 percentage points to 4.25 percent and the deposit rate, which is important for banks, from 4.00 to 3.75 percent. Previously, interest rates had been increased ten times in a row.
Only limited stimulus for the economy
“The move makes sense because inflation in Europe is now falling towards the two percent target,” said Ifo president Clemens Fuest, welcoming the ECB's decision. However, the interest rate cut is already priced into the markets and therefore the stimulus for the economy is limited. Furthermore, given the significant rise in wages and the delayed interest rate cuts in the US, it is doubtful that the ECB will cut interest rates again soon, the economist said.
DWS expert warns: “It could take longer until the inflation target is reached”
According to Ulrike Kastens, European economist at the DWS Group, the ECB's upwardly revised inflation forecasts, in particular for 2025, suggest “that it could take longer until the inflation target is reached.” This only suggests very gradual interest rate cuts. The DWS Group expects new flexibility measures in September and December.
Still, ECB President Christine Lagarde had not committed to setting a timetable last week. “Inflation data in particular will determine the pace and timing of the next interest rate hikes,” says Nicolas Forest, chief investment strategist at asset manager Candriam. He expects two more interest rate cuts by the end of the year. Although the current measure does not mark the beginning of a cycle of sustained easing, it should provide further support to European stocks, particularly small and mid-caps, given the favorable macroeconomic environment, explains Forest.
For the head of Frankfurt asset manager Mainsky Asset Management, Eckhard Schulte, European stock markets are currently in a tactical “sweet spot” and should continue to offer investors attractive returns in the coming weeks.