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The European Central Bank (ECB) yesterday cut its deposit mechanism interest rate by 25 basis points, the second cut this year (the other two rates were cut by 60 basis points), but this is only a technical adjustment and is intended to reduce the interest rate of the deposit mechanism. The spread between the interest rate and the main refinancing rate narrowed from 50 basis points to 15 basis points, so don’t be confused: this is not additional easing, nor is there any dramatic reaction in the market).
But ECB President Christine Lagarde kept a poker face about the next move and said she would not commit to a specific path for interest rates.
The latest forecasts aren’t helping either. European officials lowered their economic growth forecasts for the next two years and kept their inflation forecasts unchanged, but raised their core inflation forecasts for this year and next. It’s like tightening your belt on one side and loosening it on the other.
The ECB meeting therefore ended with many unanswered questions. The ECB is now widely believed to avoid another interest rate cut in October – with the odds falling from 40% to 20% after yesterday’s decision. German 10-year Bund yields rebounded from August lows and the euro strengthened on suggestions the European Central Bank would do less to rescue the economy and more to ensure price stability than the Federal Reserve. EURUSD has rebounded from 1.10 and is trading at 1.1086 at the time of writing.
In equities, the ECB’s decision had a good reaction to the Stoxx 600 index. The index was up 0.80% yesterday, but the news flow was anything but intoxicating. Stellantis has announced it is suspending production of the electric Fiat 500 in Italy due to a lack of orders in Europe. Stock prices fell.
