Minutes of the June meeting of the European Central Bank: Two more rate cuts expected within the year, confident in the inflation outlook

On Thursday, July 4th, the European Central Bank released the minutes of its June monetary policy meeting.

The minutes showed that the ECB's concerns about policy restraining economic growth have eased, with a positive outlook on inflation prospects. It is expected to cut interest rates three times this year, which is a slight revision from previous expectations.

Members generally believe that there has been further progress in the underlying inflation dynamics, and most members are confident that inflation is expected to sustainably decline to 2% by the end of 2025.

Those with dissenting views believe that the mid-term data does not support a rate cut, especially as recent data shows sticky inflation, and geopolitical risks may further elevate this risk. In addition, decoupling from the trend of US interest rates may increase inflationary pressures under the influence of exchange rate effects.

Members emphasized that as long as achieving the current inflation target remains necessary, the bank will maintain sufficient policy rate constraints.

At the previous monetary policy meeting in June, as expected, the ECB cut interest rates by 25 basis points, marking the first time since 2019 and becoming the second central bank among G7 member countries to cut rates.

Expected Three Interest Rate Cuts This Year

Regarding the interest rate cut path, the ECB committee expects to cut interest rates three times by the end of 2024, each time by 25 basis points, exceeding market pricing. However, the overall magnitude has been reduced by about 20 basis points compared to the expectations in April.

The summary shows that market participants had fully priced in the ECB's rate cut of 25 basis points in June and expected the bank to cut rates 1-2 more times before the end of the year.

Due to the recent global inflation trends being similar, the ECB expects the easing cycles on both sides of the Atlantic to shorten.

Raised Inflation Expectations for the Next Two Years

At the June meeting, the ECB raised its overall inflation forecasts for 2024 and 2025, expecting the average inflation rate in the euro area to decrease from 5.4% in 2023 to 2.5% in 2024, and to reach the target level in the second half of 2025.

The minutes indicated that this reflects the rise in commodity prices and unexpected increases in service sector inflation, leading to a slowdown in the pace of inflation decline, with high uncertainty about the benign assumption for inflation in 2026.

Overall, the ECB is confident about the inflation outlook, but the exact rate at which inflation returns to the target remains uncertain.

Ahead of the release of the minutes, Lane also stated in a public speech that the bank does not fully believe that price pressures have been sufficiently contained, saying:

"The domestic inflation rate we can influence is lower than the peak a year ago, but still around 4%."

ECB members assess that if wage or profit increases exceed expectations, the inflation rate may be higher than expected. Additionally, geopolitical risks are also significant drivers