ECB cuts rates as expected, despite sticky inflation

Today's decision by the European Central Bank (ECB) to reduce the deposit rate by 25 basis points from 4.00% to 3.75% was almost a foregone conclusion.

06 June 2024

But in the weeks running up to the decision, the context for a rate cut had been getting increasingly challenging. The reason? Inflation in Europe has not been on a neat downward trajectory, echoing the same awkward policy and credibility dilemma faced by the Federal Reserve in the US. While the drivers for persistent inflation on both sides of the Atlantic have differed up to now (fiscal stimulus in the US, energy prices in Europe), there are signs that they are now converging. Given that US inflation historically tends to lead European inflation, it is perhaps unsurprising then that the more recent inflation data in the eurozone started to see strength in services prices and, to an extent, wages too.

The investment implication is that the eurozone is not about to embark on a rapid monetary easing cycle and so for those thinking about dipping their toes back into the old continent, it may be worth thinking about which areas of the market could thrive best in a scenario where firmer growth co-exists with stubborn inflation and relatively high rates. Europe's banks have been on a tear of late, but it should also be remembered that Europe does not have the kind of all-weather technology stocks in the US index which appear almost indifferent to the rapidly evolving inflation and rates narrative.