The ECB may start cutting rates earlier than the Fed due to inflation

Experts believe that the European Central Bank may begin to ease its monetary policy earlier than the US Federal Reserve. This is due to the fact that inflation in the eurozone is slowing down faster than predicted, while inflation dynamics in the United States remains uneven.

In March, the growth rate of consumer prices in the eurozone decreased to the lowest values since November last year, amounting to 2.4% y/y compared with 2.6% in February. Core inflation, which does not include the cost of food and energy, also fell to the lowest level since February 2022 – 2.9%.

While the key inflation indicator tracked by the Fed, the PCE index, increased to 2.5% in February from the previous 2.4%. However, the PCE Core index fell to 2.8% from 2.9%.

Fed Chairman Jerome Powell said that the fight against inflation has not yet been completed, noting that he does not consider it advisable to lower the rate until there is sufficient confidence in the steady movement of inflation to the 2% mark.

Traders expect the Fed and the Bank of England to cut rates several times (by 25 basis points) in 2024, and the ECB will do so at least three times.At the moment, the Fed's base rate is 5.25-5.5% per annum, the Bank of England – 5.25%, and the ECB – 4.5% on loans, 4% on deposits and 4.75% on margin loans.

The next meeting of the ECB will be held next week, and it is expected that it will make it clear that it is approaching an easing of its policy.

However, the ECB still has reasons to be cautious. Inflation in the services sector in the eurozone remains high, and a significant discrepancy in monetary policy with the Fed can cause sharp fluctuations in the currency and debt markets.