ASX investors woke today to news that the European Central Bank had cut interest rates.
In a broadly expected move, the ECB lowered the official interest rate by 0.25%, taking it from 4.00% to 3.75%. This marks the first easing by the ECB since 2019.
The bank noted that since its council meeting in September "inflation has fallen by more than 2.5% and the inflation outlook has improved markedly".
Explaining its decision, the ECB stated:
Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady.
But the inflation genie is not yet securely back in its bottle.
The ECB cautioned:
At the same time, despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.
Indeed, inflation in the EU in May picked up more than expected with rising wages expected to keep the pressure on rising prices for some time yet. This could see interest rates in the EU remain higher for longer.
Addressing the sticky inflation, ECB president Christine Lagarde said (quoted by The Australian Financial Review), "Inflation is expected to fluctuate around current levels for the rest of the year. It is then expected to decline towards our target over the second half of next year."
Still, consensus expectations are for the next ECB interest rate cut in September.
But to achieve that, inflation in the EU is going to need to continue to moderate.
According to the ECB:
The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim.
What does the ECB interest rate cut mean for ASX investors?
There'll be some ASX companies that could directly benefit from lower borrowing costs in the EU.
But as a whole, ASX investors are waiting to reap some bigger benefits from interest rate cuts by the RBA and the US Fed.
Now the RBA will remain focused on Australia's own inflationary data. But it's worth noting that the ECB's rate cut follows on the Bank of Canada's 0.25% cut the day before, which brough Canada's cash rate down to 4.75%.
And with more central banks opting to ease ahead of the US Fed, it could nudge the RBA board in the same direction.
As Doug Porter, chief economist at the Bank of Montreal, said following the Bank of Canada's interest rate cut:
There is safety in numbers. If central banks see their counterparts heading that way, that gives them some comfort that they're not completely misreading the situation. I think it does make it easier for other central banks to start cutting too.
European stock markets broadly closed higher on the news. Here in Australia, the S&P/ASX 200 Index (ASX: XJO) is up 0.2% in morning trade.
