US inflation clouds prospects for ECB pledge to cut rates this summer

The governing council of the ECB meets on Thursday in a gathering in Frankfurt that financial markets believe will mark some sort of pivot in terms of signalling its rate-cutting intentions 

The governing council of the ECB meets on Thursday in Frankfurt.

The European Central Bank is likely to rein in its guidance or hints it will start cutting interest rates in June, as US inflation crept higher.  

The governing council of the ECB meets on Thursday in a gathering in Frankfurt that financial markets believe will mark some sort of pivot, at least in signalling its intentions, after it started out in July 2022 aggressively hiking official rates in its fight against inflation. 

With eurozone inflation now cooling in recent months, most traders are betting that the ECB would set the path for its first rate cut in June, and use Thursday's meeting to signal its intentions in that direction. 

However, the latest reading of inflation across the Atlantic has raised doubts that the ECB president Christine Lagarde in her remarks to the media at Thursday lunchtime will now commit to a June cut, even in the weakest of signals, and therefore keep markets and borrowers across Europe on tenterhooks.  

Consumer price inflation in the US exceeded expectations to rise to 3.5% March, up from 3.2% in February and a rate of 3.1% in January. The higher-than-expected outcome could prompt the US Federal Reserve to delay interest rate cuts and, in turn, could influence the ECB about its rate-cutting path. 

The ECB is expected to provide some details on its roadmap for interest rate cuts this year at the Frankfurt meeting. Experts have bet in recent weeks that the ECB will cut at least once this summer, but the Governing Council may now bide its time. 

European policymakers continue to monitor moves by other regulators and some have also voiced concern about rising wages in the eurozone which could contribute to higher prices and subsequently push out interest rate cuts.

The ECB will also have to weigh the damage that high cost of borrowing is inflicting on growth in Germany, the eurozone's largest economy. 

"For the ECB, it's not just weighing up whether inflation's resurging, they're also trying to balance not shifting us into recession and not leaving rates too high for too long," said Morningstar's European market strategist Michael Field.  

Like most observers, leading Irish mortgage broker Michael Dowling has predicted that the ECB will reduce official rates by a quarter of a point in June, and then cut again through the rest of the year and into 2025, for a total reduction in interest rates of 1.25%. 

Mr Dowling also said the projected rate cut, along with a technical realignment of ECB base rates, will benefit Irish tracker mortgage households automatically. 

Tracker mortgage holders will see a decrease of 1.55% over the next 12 to 18 months, shaving €1,080 off their annual mortgage repayments, Mr Dowling said. 

His estimates are based on the fact that tracker holders have an average outstanding balance of €133,000 on their mortgages and with 11 years left to pay off their loans.  

He said based on an average mortgage of €300,000 over a 35-years, the reduction in monthly repayments would be €135, or €1,620 a year. Mr Dowling was, however, doubtful that Irish banks will be eager to pass on the rate reductions to their fixed-rate mortgage customers.