European Central Bank to Cut Interest Rates for First Time in Five Years

European Central Bank will likely cut interest rates at its meeting this Thursday for the first time since almost five years. A survey of the private sector showed that activity had increased at the fastest rate in a full year, while inflation was cooling.

S&P Global’s latest HCOB PMI data shows that private sector output increased in the majority of economies using euro. Growth in Germany, Italy, and Spain were only marginally offset with a decline in France.

Businesses said that they raised prices less than in April in anticipation of the European Parliament elections, which will take place this week. This has led to lower inflation in the eurozone despite the fact that raw materials and input costs have risen beyond levels seen prior to the pandemic.

The headline business index rose to 52.2 from 51.7 in the month of April. A figure higher than 50 signifies growth.

On Thursday, the ECB’s rate-makers will meet in Frankfurt and are expected to shave a quarter percentage point from its 4% interest rate on deposits.

The financial markets expect Christine Lagarde to refrain from announcing a series rate cuts throughout the year, despite concerns about inflationary pressures rising in the wake of the recovery of growth in the 20-member currency block.

Borrowers were concerned that the central banks would delay a cut in interest rates after data revealed the eurozone’s inflation increased to 2.6% in may from 2.4% in the month of April. However, the rise could be just a temporary blip if PMI data reveal a new downward trend.

The eurozone economy expanded during the first quarter following a mild contraction that occurred in the second half 2023.

Bill Papadakis is a senior analyst at the consultancy Lombard Odier. He said: “After two stagnant years, Europe’s 2024 economic development is proving to be positive.” The ECB has begun to cut interest rates because the ECB’s growth is increasing, unemployment is at a record-low, and inflation is normalizing.

France was the only outlier among the top four economies after a small contraction in the private sector in May, which contrasted the growth of Germany, Spain, and Italy. Spain’s top ranking was confirmed after its growth rate reached a record high of 14 months.

In a survey of US companies, all sectors grew faster in May than they did in April. The only exception was the healthcare sector which shrank for a second consecutive month.

S&P Global PMI revealed that “greater demand from customers” and new orders in the financial sector helped to push growth higher. “This indicates a more optimistic landscape for US companies, as six out of seven sectors monitored registered an increase in output”.

According to S&P Services’ PMI, growth in the UK service sector slowed in May as new orders and business activity dipped from an 11-month peak in April.

S&P Global PMI is closely watched because the service sector accounts for 75% of all private sector activity.

The activity index dropped to 52.9 in April, its lowest level since November of last year.

Joe Hayes is the principal economist of S&P Global Market Intelligence which compiles these data. He said that surveys of both the manufacturing and service sectors showed the UK economy losing momentum. It was expected to grow by only 0.3% during the second quarter compared to 0.6% in the first.

He said that the Bank of England needed to be reassured before its meeting of the monetary policy committee later this month in order to lower the cost of borrowing.

He continued: “This is now the third month in a row that the selling price inflation has slowed down in the service sector. This is very encouraging for the MPC, and shows that the trend of service prices is on the right track.

It is important to note that the PMI’s measure of UK service inflation is still well above the pre-pandemic level, which could give greater weight to those who suggest the Bank of England wait until August before easing policy.