ECB to Set Up June Rate Cut After Rapid Inflation Fall

• The European Central Bank is all but certain to keep borrowing costs at a record high on Thursday but is likely to signal that a rate cut could come as soon as June, given a sharp slowdown in inflation and continued economic weakness.
• The ECB has kept interest rates steady since September but has already signalled that cuts are coming into view, with policymakers awaiting a few more comforting wage indicators before pulling the trigger.
• The only complication could be if the U.S. Federal Reserve delayed its own policy easing, although even that might slow but not stop the ECB given a widening performance gap in the world's biggest economy and the 20-country Eurozone.
• The Eurozone is now in its sixth straight quarter of economic stagnation and the labour market is starting to soften. Meanwhile, the U.S. economy continues to grow above trend, its labour market remains tight and inflation rose more than expected last month, raising the risk of price growth getting stuck.
• Policymakers have pointed to a June cut in the 4% deposit rate so often that investors consider it an effective pre-commitment and any walking back would risk damaging the ECB's credibility.
• However, ECB President Christine Lagarde is likely to avoid any talk of what happens beyond June, especially as there is little consensus yet on how far and fast interest rates need to fall. Markets have priced in 80 basis points of cuts this year, or between three and four moves, but these expectations have moved in a wide range.

(Source: Reuters)