ECB likely to cut rate in June, more stimuli likely in September

The European Central Bank is expected to adopt further policy easing in June, with more stimulus measures likely in September, after it had cut rates in March this year. However, the ECB kept monetary policy unchanged in April, largely to implement other measures announced in March.

The March policy meet witnessed, alongside a rate cut, measures to increase the monthly pace of asset purchases to €80 billion (with corporate bond purchases from June) and preparations for a new funding programme for banks (TLTRO II) to incentivize lending.

Growth figures witnessed an upswing with Eurozone Q1 GDP surprisingly strong at 0.6 pct on quarter, supported by boost in domestic demand. Annual headline inflation fell in to negative territory in April, as per the CB’s expectations, to 0.2 pct.

"Growth outperformed both the US and UK, but we expect it to slow in Q2," said Lloyds Bank in a recent report.

In addition, ECB President Mario Draghi said that it will require time and patience to witness the impact of policy stimulus measures on inflation. However, it will remain concerned about the extent of the decline in core inflation (excluding food and energy) which fell back to a one-year

low of 0.7 pct in April.

"We have maintained our forecasts for German 2yr and 10yr bund yields at -0.5 pct and 0.3 pct

respectively, by the year end, with risks to the downside if the anticipated start of the recovery in inflation later in the year fails to materialize," said Lloyds Bank in a research note.