After the June cut: what’s ahead for ECB rates

Many analysts had considered it highly unlikely, however it actually happened: In June, the European Central Bank (ECB) cut interest rates, even though it was evident that the U.S. central bank (Fed) would not be ready to cut as well.

Upon closer examination, the ECB wasn't as bold as it seemed, as both the Swiss and Swedish central banks had already cut interest rates. And even in the race to be the first G7‌ country to lower rates, the Frankfurt-based monetary authority was outpaced by the Canadian central bank, although just by a few hours.

Now, attention turns to July 18th, when the ECB Council would have the next opportunity to cut interest rates. Ulrike Kastens, senior ECB watcher at DWS, doesn't expect another rate cut this time: “The path of interest rates in the coming quarters will differ significantly from the rate-cutting cycles of recent decades, when central banks had to step in to cushion a recession or mitigate the effects of a crisis. Now, it’s about scaling back the degree of monetary tightness.'

Western central banks are starting their easing journey from interest rate levels which are significantly above the neutral rate. This means that monetary policy is restrictive, which, intentionally, is dampening demand and slowing the economy in order to bring inflation rates back in line with the definition of price stability. The path ahead for the next quarters is likely to be a gradual scaling back of policy rates toward the neutral rate.