The European Central Bank (ECB) Council to decide on a first rate cut by 25 basis points at its meeting today is still expected by the vast majority of economists. However, the warning signals from the ECB's environment in recent weeks have also changed expectations for further rate decisions this year.

It is no longer taken for granted that the ECB will return from the current level of 4.5 percent with each regular meeting.

This is likely to initiate the phase of normalization. This is made possible by the decreased inflation and the need to give the economy more breathing room again. However, how steep the rate cut path will be and where the endpoint of the cuts will lie, has become more uncertain again. Recently, inflation has picked up slightly, and price increases in the service sector have also exceeded expectations. On the other hand, the labor market situation in the euro zone has brightened, and there are signs of an economic revival.

Fed Rate Cut Still Distant

Some analysts believe that the diminished hopes for rate cuts by the US Federal Reserve (Fed) could also spill over to Europe. The inflation trend in the euro zone shows a clear correlation with that in the USA, but with a two to three-month delay.

«America's troubles with sticky inflation could yet wash up on European shores,» ING economist Carsten Brzeski is quoted by the news agency «Bloomberg.» «The ECB would be well-advised not to categorically reject the risk of reflation witnessed in the US and to remain cautious.»

Konstantin Veit of Pimco also sees a connection. «So if the US turns out to have a bigger problem, it's unlikely that the euro zone doesn't have at least a minor one.»

Different Inflation Drivers

However, the economic situation in Europe and the USA differs significantly. While in America inflation is driven by the economy, the strong labor market, and rising wages, in Europe it was primarily the energy price shock following Russia's attack on Ukraine in the spring of 2022.

«The cause of US inflation hasn't yet been resolved,» says Holger Schmieding, Chief Economist at Berenberg Bank. «Domestic final demand continues to grow strongly. In the euro zone, however, the Putin shock has largely been overcome. Here, however, the economy is weakening. This is a clearer reason to reduce rates as soon as possible.»

Only with a clear weakening of the US economy is a rate cut expected in the USA this year.

SNB to Decide on June 20

In Switzerland, economists also expect falling interest rates after the National Bank had already preemptively cut rates to 1.5 percent in February. The latest inflation figures, with an annual rate of 1.4 percent in May, keep the scope for another cut open. However, the economy, particularly the industry, is suffering from weak demand from the euro zone countries.

The SNB will decide on interest rate policy on June 20 and present its monetary policy assessment.