Market Report

ECB rate cut could stimulate investor sentiment

European borrowing rates should fall this week

Europe’s Central Bank is tipped to accelerate the reversal in interest rates this week, though UK borrowers may have to wait until August or September for the Bank of England to act.

Analysts expect the Frankfurt-based ECB to cut a key borrowing rate to 3.75%, signalling a degree of confidence that inflation has been tamed.

The Bank of Canada’s first rate cut in four years means it joins Switzerland and Sweden in starting to loosen monetary policy.

However, the ECB decision is far more important as far as markets are concerned. Dan Coatsworth, investment analyst at AJ Bell, said: “The ECB is expected to be the first of the core trio – Europe, the UK and the US – to cut rates following the post-pandemic, inflation-fuelled surge in borrowing costs.

“The market already expects a 25-basis point reduction to stimulate more economic activity in the Eurozone, but that event coming true could still be a major catalyst to improve investor sentiment.”

While persistent price pressure in the US may delay the Federal Reserve’s next downward move, the Bank of England has been sending messages that a rate cut is due.

However, the general election has effectively ruled out a cut at its next meeting on 20 June, just two weeks before voters go to the polling stations.

An economist at the British Retail Consortium, Harvir Dhillon, told Daily Business last week that inflation could rise to 3% by the autumn, putting pressure on the Bank to delay further rate cuts.

The FTSE 100 had a see-saw session but managed to close the day 0.3% higher.

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