ECB to lower rates again today
US equity markets fell yesterday, led by a 3% decline in the Nasdaq, extending their losses after Fed Chair Powell reiterated that the central bank will keep interest rates on hold for now as it assesses the inflationary consequences of Trump’s tariffs. US bonds rallied (yields fell) as stocks sold off, while the dollar lost ground to the yen and Swiss franc but held its own against the euro and gained ground against sterling. Ahead of the ECB rate announcement later today – a 25bps cut in the deposit rate looks a near certainty – the euro is trading a little north of $1.1350 against the dollar and just below £0.86 against sterling. The pound is trading at around $1.3250 against the dollar, up from yesterday’s low of about $1.32.
US bond yields fell by 5-8bps amid the decline in equity markets, while UK and German yields were flat to marginally lower on the day. European stocks are a touch softer at the start of play this morning having ended largely unchanged yesterday, while US stocks look set to open in positive territory later according to the futures market.
In his remarks yesterday, Powell said “tariffs are highly likely to generate at least a temporary rise in inflation”, but acknowledged that the “inflationary effects could also be more persistent”. He said the Fed’s “obligation” is to “make certain that a one-time increase in the price level does not become an ongoing inflation problem,” while also admitting that it is likely to find itself “in the challenging scenario” (in terms of setting interest rates) where inflation and unemployment are both rising at the same time.
Today’s ECB rate decision seems fairly straightforward. The tariffs imposed by the US on the EU will dampen growth and inflation in the Euro area, at a time when the former is already subdued and the latter is already running very close to the 2% target, while the recent appreciation of the euro, which may have taken the ECB by surprise, will exacerbate these effects. So another 25bps cut in the deposit rate (to 2.25%) looks a near certainty, with further reductions likely over the coming months.
It’s relatively quiet in terms of economic data today, with housing starts/building permits and the regular weekly jobless claims due in the US.