European Macroeconomic Update: Gradual Policy Easing Ahead

In this latest edition of the Morningstar DBRS Macroeconomic Update for Europe, we discuss how future Monetary policy easing in the Euro Area will be gradual and the decision of the Bank of England to leave unchanged its policy rates.

Euro Area
-- The European Central Bank's (ECB) first cut in policy rates since 2019 will be followed by a gradual reduction of interest rates in the near term, determined by the path of inflation.
-- Economic performance is set to strengthen gradually during the remainder of the year, mainly driven by higher private consumption, and investment will also recover, benefitting from further spending of NextGeneration EU (NGEU) resources.
-- In our view, downside risks to the growth outlook this year include a prolonged period of high interest rates and inflation, an intensification of global geopolitical tensions, and potential severe droughts and/or floods leading to higher food prices or business and tourism disruptions.

United Kingdom
-- The Bank of England (BoE) kept its policy rate unchanged, as prices of services remain high. The labour market is loosening, but remains tight by historical standards.
-- High interest rates in the UK continue to impact the housing market, although signs of stabilisation are emerging supported also by the economic recovery, and the still tight labour market.
-- In our view, downside risks to the outlook this year include renewed inflation, a prolonged period of high interest rates, renewed financial market turmoil, or an intensification of global geopolitical tensions.

“We do not expect a cycle of rapid interest cuts in the Euro Area in the near term, therefore, financing conditions are likely to remain restrictive for some time,” said Carlo Capuano, Senior Vice President, Sector Lead, in the Global Sovereign Ratings Group. ”But growth will gradually pick up and we anticipate Southern European countries to overperform Northern Europe because tourism and NGEU spending remain supportive, while energy-intensive sectors and residential investment are set to recover only gradually.”