With Donald Trump, interest rates remain high
Though inflation is declining, the ECB's interest rate hike may need to proceed cautiously. For Europe's economy, political risks are no longer the greatest threats, but rather supply chain disruptions, price increases, or the departure from Russian gas.
Bad news for investors: Despite decreasing inflation, it will likely take a while longer before central bankers significantly reduce their monetary tightening and noticeably lower the benchmark interest rate. Economists polled by Bloomberg believe that Eurozone bond investors, given the multitude of unquantifiable political risks, may proceed with caution rather than aggressively exiting the historic interest rate hike phase.
In June, the ECB had initiated the interest rate hike cycle and lowered the benchmark interest rate to 4.25% for the first time in five years, instead of raising it. However, this does not mean that the situation will remain the same during the upcoming Thursday meeting before the summer break. Quite the contrary.
According to Bloomberg, experts predict that the central bankers will take a pause first, and it may take until autumn 2025 for the benchmark interest rate to have dropped to a more manageable 2.5%.
Trump's Shadow Looms Over Europe
This is mainly due to the increasing difficulty of predicting economic developments. In fact, ECB experts base their decisions on the data of wage and price developments, aiming for long-term inflation to stabilize around or close to their target of two percent. However, in the current volatile environment, little is certain.
A series of major political events could have significant implications for the European economy. First and foremost, the potential return of Donald Trump as U.S. President: This is the greatest threat to growth and falling interest rates for the majority of economists in the survey. Immediately following that is the political deadlock after the French elections - and the potential re-ignition of the debt crisis.
In such turbulent times, central bankers prefer not to commit to a specific strategy. They wait and react when something happens. "There is simply no need to lower interest rates further at the moment," quotes Bloomberg ING Chief Economist Carsten Brzeski. "The ECB will stick to its data-driven approach and refrain from making any interest rate forecasts."
Investors Long for Rate Relief
Unexpectedly, the gradual timeline could be accelerated by competition from overseas. In the US, the unexpectedly slowing price explosion this week has already affected stock markets. The US Consumer Price Index fell surprisingly to just three percent in June – the lowest level since summer 2023.
Investors in the US are now hoping that the Federal Reserve (Fed) will lower interest rates at its September meeting. Fed Chairman Jerome Powell has already hinted in this direction and pointed out that another weakening in the labor market would no longer be desirable.
Should the Fed act, the pressure on the ECB would increase to follow suit. However, this would only be the case if the difference between the ECB's benchmark interest rate and the US rate became too large. That is, unless something unexpected happens again.
The United States Presidency Election 2024, potentially featuring a return of former President Donald Trump, is viewed as the greatest threat to growth and falling interest rates by a majority of economists. This political uncertainty could potentially re-ignite the debt crisis in Europe, making Eurozone bond investors cautious.
Given the potential impact of the United States Presidency Election 2024 on European interest rates, the EZB might need to pay close attention to developments in the United States. If Donald Trump wins the election and implements policies that negatively impact the global economy, this could lead to an increase in interest rates in the United States, putting pressure on the EZB to follow suit or risk having an uncompetitive interest rate.
