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Despite expectations of another rate cut this year, investors are questioning the timing. Cutting rates while inflation remains high could harm the ECB’s credibility. Traders now predict just one more rate cut this year, with September being the most likely timing.
“Going forward, for the ECB’s credibility, they will need to hold a very, very neutral stance,” said Vasileios Gkionakis, senior economist, and strategist at Aviva Investors, on Bloomberg Television.
He suggested the ECB might have cut rates due to prior commitments rather than current conditions. He described the decision as “almost exclusively driven by it being far too embarrassing for the Governing Council to back-pedal” on their earlier promises.
This decision begins to reverse the series of unprecedented rate hikes used to combat the euro zone’s severe inflation spike. This move positions the ECB ahead of the US Federal Reserve and the Bank of England in loosening monetary policy.
The goal is to boost the 20-nation economy after two years of stagnation and mild recession. However, recent data, including May inflation, early-year wage increases, and private-sector business activity, have been higher than anticipated.
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