All Eyes on ECB

At 1315 today, attention will turn to Frankfurt where the ECB are widely expected to conduct their first cut to all three of their main refinancing operations rates, deposit facility rate and marginal lending rate since 2016.

Presently, money markets are fully pricing in a 25bps rate cut from the ECB today. Looking further ahead, markets are implying around an 80% chance of another 25bps cut by September.

Pressure on the ECB to cut rates has been building, giving how inflation has dropped significantly from the record high 10.6% headline figure seen during October 2022. Growth concerns – not least from the power houses of the German and French economies – have also added to such sentiments as business and households continue to grapple with rates being at their highest level in the currency union’s history.

Nevertheless, since the ECB’s last meeting, CPI across the eurozone rose from 2.4% to 2.6%, indicative of the challenges that policy makers continue to face in brining inflation back down to their 2% target. As such, some are indicating that Lagarde will try to caution against markets over exaggerating rate cut expectations moving forward.

In Wales, yesterday evening a vote of no-confidence was called on Vaughan Gething just 77 days into his new role as First Minister.

The Conservatives initiated the process, citing how donations totalling £200,000 had been accepted by Gething’s leadership campaign from a company owned by an individual twice convicted for environmental offences.

29 MSs (Members of the Senedd) ultimately supported the motion of no-confidence against 27 who opposed it. With two of Gething’s Labour colleagues ostensibly “off sick” and “working from home” the vote raises further questions over his own support in the party.

While the losing the vote of confidence will no doubt be a crushing blow to Gething, as it is not legally binding, he has stated his intention to remain in office. Following the vote, he said that “I’m going to carry on doing my duty.”

Yesterday, the Bank of Canada cut their benchmark interest rate by 25bps, in a move that had been widely expected but not fully priced in by the market.

Following 11 months of rates at 5%, the move now brings rates down from the highest level seen since 2001.

Citing easing inflation, the BoC noted that CPI fell to 2.7% in April from 3.4% in December and moved “near the historical average”. They also saw that inflation will continue to move towards their 2% target, noting that wage pressures were also “moderating gradually”.

Policy makers warned however that shelter price inflation remains high, indicative of how Canada is not out of the woods when it comes to inflationary pressures.

As such, though the BoC’s Governor Tiff Macklem said that it “is reasonable to expect further cuts to our policy interest rate”, they caveated this by saying that “we are taking our interest rate decisions one meeting at a time.”