Policymaker: ECB’s first rate cut can be in June, second in September

Bundesbank President Joachim Nagel has advised the European Central Bank (ECB) to exercise caution in its interest rate decisions. He suggests that the ECB should wait until September for any subsequent rate cuts after implementing a reduction in borrowing costs in June. This warning comes ahead of a crucial meeting where officials are expected to lower borrowing costs for the first time since concluding an unprecedented tightening campaign.

Nagel warned against following up next month’s prospective easing too quickly, stating that if there is a rate cut in June, they have to wait. The comments come less than two weeks before a crucial meeting, at which officials are widely expected to lower borrowing costs for the first time since concluding an unprecedented tightening campaign.

What happens after June is less clear, with stronger growth momentum, sticky inflation, and stubborn wage growth reducing the case for a series of quick back-to-back interest rate cuts. Markets are still betting on a first quarter-point cut in next month, with a 60% probability of another move in September. The chance of a third cut later this year is now seen as one-in-three, a shift from last week when three cuts were virtually fully priced.

Cutting at those three meetings would align ECB steps with its timetable of compiling forecasts on a quarterly basis, giving policymakers a more thorough analysis on which to base their decisions. New ECB data showed a key gauge of euro-area salaries unexpectedly failed to slow at the start of 2024, a warning sign to policymakers counting on a slowdown to maintain the retreat in inflation. Negotiated wages increased 4.7% from a year ago, matching a record set in the third quarter of last year.

ECB President Christine Lagarde earlier this week said she is confident that inflation is “under control,” though also refusing to commit to a certain rate path after a likely first cut in June. Most policymakers have been mute on what happens after June, though Executive Board member Isabel Schnabel suggested last week that she is opposed to July action.

Cutting at those three meetings would align ECB steps with its timetable of compiling forecasts on a quarterly basis, giving policymakers a more thorough analysis on which to base their decisions.