ECB will cut interest rates 'by more than the market expects'

European Central Bank and Bank of England won’t delay cutting rates despite the Fed's apparent reluctance, amid hotter inflation in the US

Capital Economics’ group chief economist Neil Shearing feels that the US will cut rates later this year despite what he calls 'the hawkish rhetoric' of US Federal Reserve chairman Jerome Powell. 

The European Central Bank and Bank of England won’t delay cutting interest rates despite the apparent reluctance of the US Federal Reserve to do so, as inflation runs hotter in the US, a leading economics consultancy has predicted.

Capital Economics’ group chief economist Neil Shearing said in a research note that, even if the US central bank “stands pat, it won’t prevent the ECB and Bank of England from lowering interest rates by more than the market currently expects”.

He said: “The collapse in interest rates following the global financial crisis compressed interest rates across the developed world around the zero lower bound.

“But this was a historical anomaly. Since the eurozone was founded in 1999, the ECB has consistently set interest rates below that of the Fed.

“As it happens, we suspect that, despite the hawkish rhetoric” from US Federal Reserve chairman Jerome Powell, that the US will nonetheless cut later this year, he said.

ECB central bankers and officials have done little to dampen expectations they will vote to cut interest rates at the next key gathering in Frankfurt on June 6.

However, US inflation, which is running hotter than anticipated, has meant markets are betting that the ECB will in turn slow the pace of its rate cuts. Markets priced in a total of 65 basis points of ECB rate cuts for this year, which implies two quarter point rate cuts, and a 60% chance of a third move by the end of the year, Reuters reported. Germany’s two-year bond yield, sensitive to policy rate expectations, traded higher to 2.99%.