Comment: ‘The ECB’s first interest rate cut will be felt around the world’

Ben Laidler, eToro’s Global Market Strategist comments:  The European Central Bank (ECB) has become the most significant central bank to start cutting interest rates, ahead of the US Fed and UK’s BoE. It’s a no-turning-back moment for the global rate-cutting cycle and especially important to supporting the burgeoning European economic and stock market recoveries.

The $19 trillion European Union economy is the world’s second largest and the biggest to join the global interest rate-cutting path as inflation has cooled. We have seen 67 interest rate cuts worldwide this year compared to only 16 hikes. This is a decisive change in trend from last year where hikes led cuts by 2:1.

The ECB rate-cutting pace will likely be measured but the impact will be large with the region’s weak economy, high debt levels, floating rate and shorter-term leverage structure. European companies will benefit given their current earnings recession, low profit margins, and cyclical stock market index composition led by financials and industrials.

Ben Nichols, Interim Managing Director of RAW Capital Partners, said: “The ECB’s decision will resonate with consumers and investors not just in the EU, but globally. While the impact of the cut is unlikely to be felt immediately, the move adds to the growing feeling that the global economy has turned a corner, and should provide some impetus to the Eurozone’s business investment, consumer spending and housing markets. We could also see investor sentiment experience something of an uptick in the aftermath of this decision, which could instigate a pick-up in global trade and investment.

“However, the risk remains that the ECB is cutting rates too early, and it will be intriguing to see if the US Federal Reserve and Bank of England follow suit in the coming months. The outlook for energy prices is unreliable and geopolitical conflict in Europe and the Middle East could create major challenges further down the line. What’s more, the Eurozone’s labour market remains surprisingly strong. Therefore, a rekindling of inflationary pressures remains a significant risk factor if the bank cuts rates too quickly.

“As a result, investors must watch on with keen interest. The challenge remains ensuring that portfolios can withstand any turbulence that arises from central banks’ interest rates decisions by diversifying across a range of uncorrelated asset classes, territories and sectors. This includes building a portfolio of both traditional and alternative investments, which will help reduce volatility, provide down-side protection, and protect recent gains.”
 

Nikos Tzabouras, Senior Financial Editorial Writer at Tradu commented:

“The ECB slashed rates in a watershed moment and at least one more cut is likely to follow this year, but a cautious approach will take hold. Officials did not pre-commit to future moves and hawks have strengthened their hand after recent inflation persistence and today’s upward forecast revisions.

“Monetary policy differential remains a headwind for the euro against the greenback and the pound, since the BoE and the Fed will not pivot for another few months. The less restrictive stance will be a boon for the German stock market and any further euro weakness can extrapolate the impact, as it would make stocks cheaper for foreign investors.”