Europe is back in the global spotlight, if only for the summer. Off the pitch, the most remarkable action is clearly the ECB’s rate cut decision. The European Central Bank rarely starts an easing or tightening cycle before the US Fed. And the latest cut is even more remarkable as it comes despite accelerating inflation and wage growth amid a cyclical rebound in the eurozone economy.
If it hadn’t banged on about it so much over the last couple of months, the June rate cut would hardly have been needed. In the past, rate cut cycles were always triggered by either a recession or a severe crisis; fortunately, we don’t have either right now, so this is another unprecedented event. After a pandemic, lockdowns, war and an energy crisis, maybe such unprecedented action is realistically ‘normal’ and hopefully won’t turn out to be a policy mistake within a couple of months.
And the rate cut decision demonstrates a shift within the ECB itself. It’s regained confidence in its own forecasting skills and takes enough comfort from the benign inflation forecast from the second half of 2025 onwards to justify cutting rates. It’s like Asterix and his magic potion. All of a sudden, the forecasts debunked and questioned by the ECB itself over the past few years have become powerful and influential again. There’s nothing wrong with that, and the rate cut decision also marks an attempt to become a real forward-looking central bank again. Better perhaps that than an uncertain institution preoccupied with backwards-looking data. It’s certainly an interesting experiment, and it won’t just be markets but other central banks who’ll be watching closely.