First rate cut since 2019

The European Central Bank’s Governing Council said the inflation outlook had “improved markedly” since September 2023, and that monetary policy had dampened demand and kept “inflation expectations well anchored.”

“Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons,” it said.

However, it added that domestic price pressures remain strong, wage growth is elevated and inflation is likely to stay above the 2% target “well into next year.”

— Jenni Reid

The European Central Bank’s Governing Council raised its closely-watched quarterly inflation forecast at its June meeting.

Staff now see average annual inflation at 2.5% in 2025, up from a 2.3% forecast issued during the March meeting.

The projection for 2025 was increased to 2.2% from 2%, while the 2026 outlook remained at 1.9%.

— Jenni Reid

The European Central Bank cut interest rates by 25 basis points at its June meeting.

— Jenni Reid

Since European Central Bank officials began signaling an intention to cut interest rates in June, they have also been emphasizing that they are willing to take this step before the U.S. Federal Reserve, which is sometimes characterized as the global leader on policy.

Fed minutes from its May meeting suggest ongoing uncertainty about when the central bank will begin to ease monetary policy.

“If we cut more aggressively than the Fed, that may lead to a lower exchange rate on our end, which would be inflationary,” ECB Governing Council member Klaas Knot said at an event in London last week.

“But less Fed cutting means tighter conditions globally. If the Fed cut less than expected, we will get two opposing effects… it is not clear [Fed policy] will move more in one direction or the other.”

Both central banks are focused on their “domestic mandate,” Knot added.

— Jenni Reid

The anticipated rate cut from the European Central Bank comes despite a disappointing euro zone inflation print for May.

Headline inflation in the bloc rose slightly more than expected, to 2.6%, the European Union’s statistics agency said last week.

While fluctuations in that rate are expected for the remainder of the year due to the impact of the energy market and the unwinding of fiscal support measures, core inflation — which excludes energy, food, alcohol and tobacco — also missed forecasts, rising to 2.9%.

Perhaps most concerningly for ECB policymakers, services inflation — an indication of domestic price pressures — edged higher to 4.1% from 3.7%.

“I think dialing back a little bit on the restrictiveness [of financial conditions] probably makes sense… growth has started to pick up, but the consumer is still struggling to find its feet here,” Nora Szentivanyi, global economist at JPMorgan, told CNBC on Thursday.

“But I think when we look at the cycle overall, I don’t see a very compelling case for material easing over the extent of the cycle. Services inflation is very sticky still. at this point, it’s running close to a 5% annualized rate, [and] wage inflation is still sicky,” Szentivanyi added.

European stocks were higher in early afternoon deals, as the ECB announcement looms, with brighter sentiment also benefiting U.K. markets.

The pan-European Stoxx 600 index was up 0.64% at 524.59 points near 11:30 a.m. London time, within touching distance of the intraday record of 525.33 marked on May 16.

The euro was trading 0.15% higher against the British pound at 0.851, and up 0.06% against the U.S. dollar at 1.087.

The shared currency has been struggling against sterling and the greenback this year, falling by 1.9% and 1.5% respectively, amid diverging interest rate expectations.

— Jenni Reid

The European Central Bank’s Governing Council will proceed with caution given the recent uptick in euro zone inflation, but would nonetheless be justified in cutting rates until the end of the year, according to its former Vice President Vitor Constâncio.

“Short-term dynamics may create in some members some doubts about the linear, continuing, declining path of inflation. So I think that the Council will be perhaps too cautious itself,” Constâncio told CNBC’s “Squawk Box Europe” on Thursday.

That means market expectations for a total of just two reductions this year, are “not off the mark,” he said.

“Although I think that there would be justification, indeed, to continue with cuts until the end of the year, because wages have been decelerating, the economy is still very weak when compared with the United States,” he continued.

Cuts would be appropriate even if the fresh ECB projections include an increase in the average inflation forecast for the year from the current 2.3%, Constâncio said.

— Jenni Reid

Despite an interest rate cut expected this week, profits at a handful of major European banks will remain robust, according to Berenberg.

One of the lender’s stocks could rise by more than 40% over the next 12 months, according to the investment bank.

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— Ganesh Rao

The European Central Bank’s set to make its decision on a day of weaker-than-expected data out of the euro zone’s largest economy, Germany.

New industrial orders in Germany were provisionally down 0.2% from the previous month, the federal statistics office said. Economists previously surveyed by Reuters had expected a 0.5% increase.

Orders were down 1.6% on an annual basis.

“New orders in April 2024 declined in four branches of manufacturing due to the significantly smaller number of large-scale orders compared with the previous month,” the statistics office said.

New orders rose 2.9% in April from March when excluding the traditionally more volatile large-scale orders.

— Sophie Kiderlin

European Central Bank policymakers are set to cut interest rates on Thursday, as the path ahead for inflation appears reassuring, Shaan Raithatha, senior economist at Vanguard Europe told CNBC’s “Squawk Box Europe” on Thursday. He added that multiple such rate reductions are on the horizon for 2024.

“Aside from slight momentum in services inflation in the most recent months it feels like the ECB have enough conviction to go ahead later today,” he said. “The inflation outlook is looking promising.”

ECB policymakers have also sent a “strong signal” that there will be further interest rate cuts beyond the one expected on Thursday, Raithatha said.

— Sophie Kiderlin

The European Central Bank is likely to look past recent “bad news” on inflation to cut interest rates in June, but may only opt for one more reduction this year, Jean-Claude Trichet, former European Central Bank president, told CNBC’s “Squawk on the Street” on Tuesday.

“My intuition is that they will pull the trigger and decrease rates by point 25 percent, even if there has been some bad news… as regards the goal, which is to stabilize prices and having inflation going down,” Trichet said.

Bad news includes the recent upticks in headline inflation, core inflation and services inflation, and negotiated wages picking up in the first quarter of the year.

The good news is that euro zone unemployment is at an all-time low and purchasing managers’ index figures indicate an ongoing economic recovery, he added.

“We must accept that data could [change] month-on-month or quarter-to-quarter so we must be prudent… based on current data, instead of thinking [the ECB] would decrease [interest rates] twice after June, it is more reasonable to think of one decrease of rates,” Trichet said.

“But again this is my central intuition, it can change. We could have a lot of better news as regards inflation and we could have even more bad news,” he added.

— Jenni Reid

Azad Zangana, senior European economist and strategist at Schroders, told CNBC on Tuesday he sees the ECB following through with its June cut, and then opting for reductions at alternate meetings for the rest of the year.

That would mean a total of three cuts implemented this year, with follow-ups in September and December, in line with the forecast in a recent Reuters poll of economists.

— Jenni Reid