ECB Cut Interest Rates, But the Fed Is Still in Charge
European policymakers will find their hands are tied by the threat of currency market volatility.
Christine Lagarde, president of the European Central Bank, after the ECB lowered borrowing costs on Thursday.
Photographer: Alex Kraus/Bloomberg
The European Central Bank joined the Bank of Canada in initiating an interest rate-cutting cycle this week, and they should be followed over the next few months by policymakers in the US and UK. While domestic economic developments compelled the moves, multiple further reductions from both central banks — and the ECB in particular — could well be prematurely curtailed by worries about how currency markets would respond if the Federal Reserve delayed its own easing.
This is amplified by the Fed’s overly reactive policy approach as well as its inflation target of 2%, which is too low for a world where support for globalization is fragmenting and the Washington consensus of liberalization, deregulation and fiscal discipline has been reversing course at an accelerating pace.
In lowering borrowing costs, Bank of Canada Governor Tiff Macklem said on Wednesday that “it is reasonable to expect that there will be further cuts,” based on the current outlook. Even though the ECB is inclined to be more guarded in its forward policy guidance, it has notably ended up cutting for the first time since 2019 before both the Bank of England and the Fed even though it started its hiking cycle after them and did not increase interest rates by as much.