The BOC and ECB are both expected to cut interest rates this week. The decision for the former is more finely balanced while the latter is a certainty at this stage. Let’s take a look at the details ahead of the meetings later in the week.
In the case of the BOC, traders are pricing in ~84% odds of a rate cut currently. That’s a substantial amount, so the risk for any outsized reaction is more if the central bank does not cut rates on Wednesday. You can check out Adam’s previous post here.
As for the ECB, it’ll end up being a non-event within a spectacle so to speak. Their decision is already set in stone, that they will be cutting interest rates on Thursday. And traders have more or less fully priced that in already. For the year itself, traders are still seeing ~57 bps of rate cuts overall. That implies another rate cut to follow after this week.
But if you’re one expecting the ECB to rush that decision, you’ll end up being disappointed.
The central bank is likely to adopt a similar language to the one now. That being they will wait on the data and take stock of the situation again after the summer. Policymakers will continue to allude to the idea of cutting further, but their conviction will ultimately depend on inflation developments.
The good thing is that recent economic data in Europe have been holding up well. The Q1 resilience is a welcome showing for the ECB, should they need backing to keep rates on hold in the months ahead.
If all plays out accordingly, the euro should see minimal reaction. The decision itself is a non-event. But the spectacle will be how Lagarde positions their policy communication in the aftermath of that.
