ECB Poised for First Interest Rate Cut Since 2019

The European Central Bank (ECB) is on the brink of cutting interest rates for the first time since September 2019, with Christine Lagarde expected to formally address the issue at today's meeting.

Investors have already shifted their focus to the upcoming decision, although the extent of the rate reduction will largely hinge on inflation levels. In May, inflation in the Eurozone stood at 2.6%, while in certain EU countries, it remains elevated at around 4.5%-4.7%.

Last year, the ECB raised its key deposit rate to 4% in response to soaring prices, which had seen the biggest increase in a generation, dampening economic activity in the process.

Holger Schmieding, chief economist at Germany's Berenberg bank, emphasized the significance of lower interest rates, stating, "Financial markets are well aware that this is coming, but the news that the ECB has started to cut interest rates may get the attention of households and businesses and boost sentiment."

Despite recent inflationary pressures, the Eurozone economy has displayed signs of recovery in the first quarter of 2024, with EU GDP rising by 0.3% compared to the previous quarter, thus breaking a period of stagnation.

This growth resurgence has primarily been driven by decreases in energy and food prices, which had surged following the conflict in Ukraine, as well as a rebound in global trade.

In Germany, the real estate market experienced a 10% decline in house prices after the ECB initiated interest rate hikes in 2022. However, stabilization has ensued this year as 10-year mortgage rates dropped from nearly 4% in October to below 3.2%.

Michael Neumann, head of private clients at Dr. Klein, noted the noticeable uptick in demand for mortgage finance following the more favorable interest rates, leading to a significant market recovery.

Marc van der Lee of the Dutch Association of Estate Agents projected that house prices in the Netherlands would rebound to record highs in the second quarter, propelled by increasing wages, housing shortages, and notably, lower mortgage costs.

By fLEXI tEAM