The ECB will cut interest rates next week, but what comes after that?

Over the last few weeks, the ECB has been clear in their messaging that they will cut rates in June. The decision at their policy meeting next week is all but a given and markets are now well prepared for that. The key question now though, is what comes next?

Inflation pressures have waned in the euro area and that has given the ECB the confidence to take the first step. But the hard part is really trying to get inflation from 3% back to the 2% target, as the Fed is also finding out in the last few months. That especially on the part of core prices.

In other words, the “easy” part is over and done with. Now, this is where the real challenge begins for major central banks.

In that regard, the ECB is also looking to wages data to try and get a better sense of the outlook. The Q1 numbers here last week were less than ideal, but they do come with a big caveat.

The large contributor of higher wages in the last quarter was arguably from Germany, which surprised with a 6.2% reading. That exceeded expectations but it is arguably a one-off amid a delayed call to action to compensate workers for the higher cost of living.

If all goes according to plan, we should see those negotiated wage numbers fall in the next few quarters. And that will hopefully help the ECB gather more confidence on the inflation outlook.

Taking that into consideration, what are traders anticipating?

After June, there will be four more policy meetings for this year. But as things stand, traders are only expecting one more 25 bps rate cut after the one next week.

The ECB has already hinted that they are not keen on a back-to-back move. Thus, July can safely be ruled out at this stage.

That leaves either September, October, or December as the potential to follow up on the June move. With the earliest still being at least four months away, there’s still plenty of room for pricing expectations to shift around. Going into next week, traders are seeing 56 bps of rate cuts for the ECB in 2024.

It’s all going to come down to the data to vindicate or change up that outlook.

If the disinflation process stays the path in the months ahead, that will definitely afford the ECB room to work with to keep at least one more rate cut in their back pocket for this year.