There is nothing that can “dissuade the ECB from starting to lower interest rates in June”, considers Senior Economist at AllianzGI

The period since the beginning of 2022 has been particularly difficult for the Eurozone economy, with a tightening of monetary policy by the European Central Bank (ECB) to avoid the threat of a sustained rise in inflation above the central bank’s target, following the Russia’s invasion of Ukraine, which caused consumer spending to slow.

The result has been an economy devoid of any significant source of domestic demand growth, while measures of inflation have, in some cases, been slow to slow down.

Ahead of the release of GDP (Gross Domestic Product) details for the first quarter of 2024, Sean Shepley, Senior Economist at Allianz Global Investors (AllianzGI) concludes that “there are hopeful signs of recovery on both sides of the economy”.

“Based on data already released by France and Spain (whose economies represent around a third of the value of economic output in the euro area) it seems likely that the GDP deflator (the broadest measure of domestically generated inflation that affects households, governments and businesses) will fall to around 4% in the first quarter, having been above 6% last fall. At the same time, consumer spending growth looks set to accelerate modestly to a pace of around 1.5% annualized, which, if realized, would be the strongest growth pace seen since spring 2022.”

Therefore, he considers that there is no data that could “dissuade the ECB from starting to lower interest rates in June”. Sean Shepley explains that, after 18 months of effective lack of growth, there should be enough capacity for domestic demand to expand without fueling concerns about a recovery in inflation.

“This combination of rising growth and falling inflation often constitutes the most benign phase of the cycle for investors and should therefore be broadly welcomed.

From now on, two schools of thought will be on the table for discussion: On the one hand, there is a significant margin for monetary easing, on the other, caution prevails. “We suspect that the resolution of this debate will be found in both Eurozone and US data. At one level, domestic progress in reducing inflation is important for validating the ECB’s own forecasts, which appear to have played an important role in keeping the central bank on track to cut rates in June despite lackluster inflation data in June. beginning of the year. On the other hand, US inflation results appear likely to affect the pace at which the ECB feels comfortable cutting interest rates.”