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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

European and Canadian central banks expected to cut interest rates this week

Euro sign in front of skyscrapers.
Markets indicate a 93% chance that the European Central Bank will cut its rates. Photograph: Xinhua/Shutterstock

Borrowers in the eurozone and in Canada are expected to get some relief from high interest rates this week.

After recent drops in inflation, the European Central Bank (ECB) and the Bank of Canada (BoC) are forecast to lower their benchmark rates in the coming days.

The ECB will set its policy on Thursday, with the money markets indicating rate cuts are a 93% chance. It is likely to lower the rate on its deposit facility, which banks can use to make overnight deposits with the Eurosystem, to 3.75%, down from its current record high of 4%.

A poll of 82 economists by Reuters last week found they all expected a rate cut at the 6 June meeting, after several ECB policymakers hinted it was a done deal.

There’s an 82% chance that the BoC will cut borrowing costs on Wednesday, from 5% to 4.75%, market pricing indicates. These odds rose on Friday after Canada’s GDP grew more slowly than forecast in the first three months of this year.

This would put the ECB and BoC among the first of the big central banks to ease policy in the current cycle, following the Swiss National Bank, which cut its rates in March.

But the future path of interest rates remains unclear, given signs that inflation could be more persistent than hoped.

Konstantin Veit, a fund manager at Pimco, said: “We believe the ECB will cut policy rates by 25 basis points at the June meeting to 3.75% on the deposit facility.

“However, what will be more interesting is the trajectory beyond June. We doubt the ECB will provide a lot of guidance here, and expect it to re-emphasise its meeting by meeting approach based on the data flow over the coming months. We think it unlikely that the ECB will commit to any particular rate path.”

Data released on Friday showed that eurozone inflation rose in May, for the first month this year, to 2.6%. That took it further away from the ECB’s forecast of 2%, but was still much lower than the year before when euro-area inflation was 6.1%.

Analysts at Nomura believe this could make the ECB cautious about pursuing an aggressive cutting cycle, but still expect several interest rate reductions in the next 18 months.

“For the ECB, we see three 25 basis point rate cuts this year and three next, taking the depo rate down to 2.50%,” Nomura said in a research note.

Canada’s annual inflation rate cooled to 2.7% in April, down from 2.9% in March, potentially clearing the way for the BoC to ease policy this week.

Goldman Sachs analysts said “disinflation is well under way in Canada”, telling clients: “We therefore expect that the BoC will determine that downward inflation momentum has been sustained and cut its policy rate by 25bp to 4.75% at [the] June meeting.”

Although UK inflation fell to just 2.3% in April, the Bank of England is not expected to cut interest rates at its meeting later this month. The first cut is not expected until November or December.

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