When the 26 members of the European Central Bank’s governing council meet on June 5 in Frankfurt, anything but another quarter-point cut in its key deposit rate would be a huge surprise.
Financial markets are pricing in a 97.5 per cent probability of such a move, according to LSEG data, which would lower borrowing costs to 2 per cent. This is the lowest in more than two years and half the level in June 2024, when the ECB started to ease monetary conditions.
That followed an unprecedented 15-month period of rapid rises to get inflation back under control. In the wake of supply chain disruptions and Russia’s full-scale invasion of Ukraine, inflation had shot up to close to 11 per cent in late 2022, more than five times above the ECB’s medium-term inflation target of 2 per cent.
Preliminary inflation data for May, which will be released on Tuesday, is expected to show annual inflation has hit the 2 per cent target, according to a Reuters poll. A stronger euro versus the dollar combined with a fall in energy prices and a potential rise of imports from China in the wake of the global trade war could all “lead to lower inflation in the euro area”, said ECB chief economist Philip Lane in a recent interview with the Frankfurter Allgemeine Zeitung.
New forecasts on GDP and inflation, which the ECB will also publish on Thursday, could indicate problems ahead. Still, ECB president Christine Lagarde is unlikely to give any meaningful guidance about the future rate path. Frankfurt’s rate setters have maintained a wait-and-see attitude, stressing that they face an extreme level of uncertainty and prefer not to commit to any path for future rate decisions. Olaf Storbeck
How is the US labour market faring during the trade war?
The strength of the American job market will be scrutinised on Friday when the Bureau of Labor Statistics releases its latest batch of non-farm payroll data.
Economists polled by Reuters expect to see the US adding 130,000 jobs in May, down from 177,000 in April and 272,000 in May 2024.
The US is adding fewer jobs compared with this time last year as Donald Trump ally Elon Musk has led a push to downsize the federal government. Outside of Washington, many companies have slowed or frozen hiring for new roles as President Donald Trump’s trade war has put markets on a rollercoaster.
Next week’s data follows a rise in jobless claims in a late May report that suggested “some loosening in labour market conditions”, said Nancy Vanden Houten, lead US economist at Oxford Economics. She also expects the waves of federal lay-offs that started in February to accelerate in the coming months.
“Continued claims continue to creep higher, confirming that workers who lose their jobs are finding it tougher to find new employment,” Vanden Houten said.
Federal Reserve staff had forecast in the latest Federal Open Market Committee minutes that US jobless numbers would rise and remain higher than the natural rate of unemployment, given the heightened possibility of an economic recession, Goldman Sachs analysts noted. Will Schmitt
Will the BoC cut rates this Wednesday?
The Bank of Canada’s interest rate decision on June 4 should shed more light on the effect Trump’s trade war has had on the bank’s expectations for economic growth.
In April, in the midst of high market volatility, the BoC kept overnight interest rates unchanged at a target of 2.75 per cent. Given the trade tensions with the US, Andrew Hencic, director of TD Economics, said two cuts of 25 basis points each could help support Canada’s economy without risking more price inflation.
The current rate could come down to 2.25 per cent by the end of the year, he said. “We think that enough slack has accumulated in the economy that there’s space for the central bank to cut its lending rate a little bit more without too much inflationary pressure coming through,” Hencic added.
However, hopes for a rate cut at the BoC’s June meeting were hit by stronger than expected April consumer price index data in mid-May. “There was a dramatic shift in market pricing — from a 70 per cent chance of a cut to 30 per cent — after the last CPI report,” said Jason Daw, the head of interest rate strategy at RBC in Toronto.
Markets are now pricing in a 22 per cent chance of a cut, according to LSEG data.
Tariffs will have a trivial impact on Canadian inflation in Daw’s view. But given that CPI has recently been above expectations, the central bank will struggle to defend rate reductions too soon.
While the labour market has been “squishy for two months . . . the bar to restarting the cutting cycle is high.” The direction of economic growth “should be down but the magnitude is tricky”, said Daw. Alan Livsey