From Morningstar:

The European Central Bank (ECB) has kept its key interest rate at record highs of 4.5% since September 2023. No hint of future rate cuts were given in their meeting on January 25. However, falling inflation numbers are putting pressure on the ECB to cut rates, with June being the earliest possibility.

The ECB’s governing council is divided on the issue of rate cuts. Board member Isabel Schnabel believes inflation could flare up again, while Italy’s central bank chief Fabio Panetta thinks the time for cutting rates is fast approaching. This highlights the discord within the council.

The inflation trend is backing the case for rate cuts. January’s fall in inflation to 2.8% in the Eurozone has added to arguments for cutting rates. Core inflation, which excludes energy and food costs, fell to 3.3% year on year. The decline is a positive sign.

Economists expect no rate cuts before June. A significant slowdown in current wage increases and further progress on inflation are needed for a rate cut in April. June is still likely for a 25 basis point rate cut. After that, the ECB is expected to reduce interest rates only gradually.

The Eurozone is facing GDP concerns, with mixed early indicators for January. The composite PMI indicator rose slightly, while the economic sentiment indicator saw progress in December but not in January. Germany, the largest economy in the Eurozone, is stuck in a recession.

Mortgage rates across the Eurozone remain elevated at 4%, while bank lending rates for firms have declined. Demand for credit from households and firms fell in the first month of the year. Consumers expect mortgage rates to decline from current levels over the next 12 months.

The ECB has more leeway to cut rates than the US Fed. The prospect of a March rate cut by the Fed seems less likely after recent CPI data. Markets are now looking at May for the first US interest rate cut. Overall, the news suggests future rate cuts by both the ECB and the Fed are uncertain.



Read more: When Will the ECB Start Cutting Rates?