Analysts seem to be agreeing that the ECB(European Central Bank) is fast approaching the end of its rate cutting cycle, unless there is a major change in the trajectory of the economic data. The vast majority of economists now expect just one more rate cut in September, as the ECB is around its “neutral” rate. But the market still sees a 50-50 chance of a second rate cut this year.
President Christine Lagarde signalled this development at the end of last month’s monetary policy meeting, when the ECB decided to cut rates. Inflation is back to the central bank’s target, while the economy seems to be showing signs of reinvigoration. The ECB(European Central Bank) might not want to keep cutting as a rebound in economic growth could see inflation resurge. And there are still lingering doubts as to whether the trade war will have an effect on inflation.
The End of the War?
There have been a couple of things that have affected the outlook lately. The spike in oil prices around the Iran-Israel conflict could put some pressure on inflation. Although, many believe it will be transitory. The increased government spending to shore up Europe’s defense with an eye on the war in Ukraine is also potentially inflationary.
But, the main war that many economists are worried about when it comes to the impact on consumer prices is trade. The US has imposed increased tariffs on Europe, and is threatening further tariffs by July 9th if a deal is not reached. The EU has agreed on retaliatory measures, but has not applied them.
My Taxes, Your Prices
It’s expected that when a country applies tariffs, it will experience inflation. However, the US hasn’t yet seen a significant uptick in consumer prices, yet. More importantly, Europe has not applied any additional tariffs, either. And, in fact, is poised to sign a trade deal with Mercosur that would lower tariffs.
But, if the US and Europe fail to reach a deal next week, then the EU could go through with its threatened tariffs. That could cause consumer prices in Europe to rise, and prevent the ECB(European Central Bank) from easing further.
What to Look Out For
Tuesday sees the release of flash June CPI for the EuroZone. It’s expected to show a modest increase to 2.0% from 1.9% prior. The core rate, which discounts more volatile elements such as energy and food prices, is expected to stay unchanged at 2.3%. That is near the ECB’s medium-term target of 2.0%.
In her most recent comments on inflation, Lagarde expressed confidence that inflation would return to the target rate soon. The ECB(European Central Bank) has only four more scheduled rate decisions this year. The unpredictability from geopolitics and US trade policy could give impetus to the central bank to keep rates on hold to see how things evolve during the summer.
![Credit Card 160×600 [EN]](https://assets.iorbex.com/blog/wp-content/uploads/2023/06/13144507/Blog-Banner_EN-Banner_160X600X2.webp)
