The European Central Bank (ECB) was criticized for being late to the party two years ago when the world’s major central banks began raising interest rates to combat the fiercest inflation surge in a generation. But it looks like it won’t be late when it comes to cutting them. The ECB is expected to lower the bloc’s key rate to 3.75% when it meets on Thursday, down from its all-time high of 4%. The move would echo similar decisions made by smaller banks in the Czech Republic, Hungary, Sweden, and Switzerland, but would be a first among the world’s biggest economies. These cuts make some sense: the eurozone got the sharp end of the stick in the energy crisis sparked by Russia’s invasion of Ukraine. This shock pushed the region’s economy aggressively lower, eventually dragging inflation down with it as consumer demand dried up. Europe is recovering now, but not vigorously. And the region’s sluggish growth suggests the eurozone could benefit from the economic stimulus that milder rates would bring. What happens next is far from certain, but the ECB won’t want to take its eye off the ball. After all, inflation is already proving bumpier than expected. Data released on Friday showed that headline and core inflation (which excludes volatile food and energy prices) both accelerated more than expected in May. And there could be even more inflationary forces ahead – a strengthening economy, for one, and a lower exchange rate, for another. See, with Europe cutting its rates and the US Federal Reserve standing still, that’s likely to weaken the euro and strengthen the greenback, making imports pricier across the bloc. So the ECB is likely to take a go-slow approach, watching the economy of its 27 member states, while also keeping an eye on what’s happening in the US. |