Regulation

European Central Bank Braces For Two More Rate Cuts, Is US Fed Next?

Published

6 months ago

August 1, 2024

Coin2049 Newsletter

The European Central Bank (ECB) is preparing for two more rate cuts, as revealed by ECB policymaker Yannis Stournaras. Hence, netizens are speculating whether the U.S. Federal Reserve would mirror a similar move in September. As of the latest update, the Federal Open Market Committee (FOMC) decided to keep rates steady.

European Central Bank To Cut Interest Rates

The ECB rate cut prediction, shared in an interview with the German financial newsletter Platow Brief, reflects the central bank’s concerns over a weakening euro zone economy. This could potentially drag inflation below its 2% target.

Stournaras serves as the head of the Bank of Greece and is considered one of the more dovish members of the ECB’s Governing Council. He highlighted the lower-than-expected economic growth and its implications for inflation. “The renewed signs of weak economic activity and the high level of uncertainty will very likely dampen inflation more than had been expected,” he stated, according to a Bloomberg report.

The statement suggests a significant risk of inflation falling below the ECB’s target in the medium term. Despite a slight uptick in euro zone inflation for July and growth for the second quarter, traders anticipate that the ECB will resume lowering borrowing costs by September or October.

Furthermore, this outlook is reinforced by ongoing surveys pointing to a deceleration in economic activity. Stournaras supported this expectation. However, he noted that forthcoming data, particularly on wages, and the ECB’s new economic projections, will be critical in shaping future decisions.

“I still expect two rate cuts this year if disinflation continues as expected,” he remarked. This underscores the delicate balance the ECB must maintain. Earlier, European Central Bank cut interest rates by 25 basis points on July 6, 2024.

US Fed To Mirror Move?

The ECB’s approach contrasts with recent developments at the US Federal Reserve. The Fed has opted to maintain its key interest rate within the range of 5.25% to 5.5%. This decision was driven by their urge to meet the 2% inflation target. U.S. Fed Chair Jerome Powell has indicated that a rate cut in September remains a possibility amid favorable inflation data.

“We never use our tools to support or oppose a political party, a politician, or any political outcome,” Powell emphasized. Meanwhile, recent U.S. job data presents a mixed picture of the economic arena. According to the data released on August 1, Initial jobless claims rose by 14,000 to 249,000 for the week ending July 27.

Whilst, continuing claims increased by 33,000 to 1,877,000 for the week ending July 20. These figures suggest a cooling labor market, which could influence the U.S. Fed’s decision-making process. If the job market continues to show signs of weakness, it might boost the case for a rate cut in the near term.

Meanwhile, across the Atlantic, the Bank of England recently cut interest rates by 25 basis points, moving them from 5.25% to 5.0%. This decision followed a narrow vote margin of 5:4. It marks the first such interest rate cut since the COVID-19 pandemic began in 2020.

Bank of England Governor Andrew Bailey cited eased inflationary pressures as the rationale for the rate cut. “Inflationary pressures have eased enough that we’ve been able to cut interest rates today,” he noted. However, Bailey also stressed the need for caution in further rate reductions to maintain low and stable inflation.

Potential Impact On Bitcoin, Gold & Stocks

The potential for rate cuts by major central banks carries significant implications for various markets. In the crypto sector, the prospect of increased liquidity is seen as a positive development. Bitcoin, which currently trades around $64,700, saw a slight decrease of 2% but remains sensitive to changes in monetary policy.

Lower interest rates can enhance the appeal of cryptocurrencies as alternative investments, driving more capital into the domain. Also, the latest US job data could further impact the crypto market. For context, weakening labor market might prompt the Fed to lower rates. It potentially leads to increased liquidity and investment in riskier assets, including the cryptocurrency market.

Investors often view digital currencies as a hedge against traditional financial instability, and increased liquidity could encourage this sentiment. Gold, traditionally viewed as a hedge against inflation, could also experience increased demand if central banks proceed with rate cuts.

Reduced interest rates typically lower the opportunity cost of holding non-yielding assets like gold. This makes such assets more attractive to investors seeking stability in uncertain economic times. However, the stock market’s response to anticipated rate cuts may be mixed.

Reduced borrowing costs can boost corporate profits and investor sentiment toward the stock market. However, the reasons for the rate cuts, such as weak economic growth and uncertainty, may negatively impact market enthusiasm.