Canada Likely to Cut Interest Rates at Least Twice More This Year... ECB Faces Uncertainty

The Bank of Canada (BOC), which was the first among major countries to pivot (policy shift), is expected to implement at least two additional interest rate cuts within this year. In contrast, the European Central Bank (ECB), which lowered rates following Canada, has refrained from signaling further cuts and is being evaluated as making a 'hawkish cut.' Some reports suggest that certain ECB members regret not being able to change their stance due to having previously given too strong signals about rate cuts.

Christine Lagarde, President of the European Central Bank (ECB)
[Image source=EPA Yonhap News]

Bloomberg reported on the 6th (local time) that, according to a survey aggregating forecasts from six Canadian banks including RBC Bank, five banks predicted three additional 0.25 percentage point rate cuts by the end of the year. The remaining bank, Bank of Montreal, also suggested the possibility of two cuts.

Previously, the Bank of Canada lowered its benchmark interest rate by 0.25 percentage points from 5.0% to 4.75% the day before. This was the first rate cut among the Group of Seven (G7) countries. The Bank of Canada explained, "There is continued evidence that core inflation is slowing," and "We agreed that monetary policy does not need to be as restrictive as it currently is." Canada's April Consumer Price Index (CPI) inflation rate slowed to 2.7%, the lowest since March 2021. Tiff Macklem, Governor of the Bank of Canada, stated, "If progress in inflation slowdown continues, there is a possibility of further cuts."

In a Bloomberg survey conducted just before this rate cut, economists had predicted that Canada's interest rate would fall to 3.5% by mid-next year.

Following Canada by one day, the ECB's outlook for additional rate cuts within the year remains uncertain. At its monetary policy meeting on the 6th, the ECB lowered its benchmark rate, deposit rate, and marginal lending rate each by 0.25 percentage points, explaining the policy decision by stating, "Price pressures have eased and inflation expectations have declined." This rate cut decision had been anticipated well in advance.

However, the market widely described it as a 'hawkish cut.' The rate cut decision was not unanimous. Christine Lagarde, President of the ECB, confirmed at a subsequent press conference that there was one dissenting vote against the rate cut. She said, "Future rate cut decisions will depend on the indicators we receive," and added, "We know the road ahead will be bumpy. It will not be smooth for several months," showing a cautious stance.

On the same day, the ECB also raised its inflation forecasts for this year and next year from 2.3% and 2% to 2.5% and 2.2%, respectively. This acknowledges that inflationary pressures will persist despite the initiation of rate cuts. As a result, the probability of the ECB making additional cuts by September fell from 70% to 60% in the interest rate futures market. Eurozone government bond yields also rose across the board in the bond market.

Major foreign media reported that some ECB members expressed regret over having sent too clear a message about a June rate cut, saying that if they had not taken it as a given, they might have made a different decision. Currently, ECB members are said to view the possibility of additional rate cuts at the July 18 meeting as low and are focusing on the September meeting. One member stated, "Considering wage growth and service prices, the probability of another rate cut next month is low."

The Wall Street Journal (WSJ) pointed out, "This ECB rate cut should not be overinterpreted as dovish," noting that "indicators such as growth, wages, and service prices do not support a rate cut." It explained that this rate cut is not the start of an easing cycle but rather a measure to reverse the most recent rate hikes.

However, at the International Monetary Fund (IMF) regular briefing, the ECB's rate cut was evaluated as appropriate. It added that it is important to maintain a data-dependent approach and a meeting-by-meeting approach going forward.

Market attention is now focused on the U.S. Federal Reserve (Fed), which is scheduled to make a rate decision next week. Unlike Canada and Europe, which have pivoted, the Fed is widely expected to maintain its current rates this month. Yael Selin, Chief Economist at KPMG, assessed, "Unlike Europe, the U.S. domestic economy remains robust."

The Bank of England (BOE), which is scheduled to meet on the 20th, is also expected to keep rates unchanged. Initially, there were forecasts that the BOE might cut rates as early as June, similar to the ECB, but recent inflation data exceeding expectations has pushed back hopes for a pivot to the second half of the year. The Bank of Japan (BOJ), which ended its negative interest rate policy, is considering the option of raising rates. Besides the G7 central banks, Switzerland, Sweden, and the Czech Republic have implemented rate cuts since the beginning of this year.

This content was produced with the assistance of AI translation services.