Fewer interest rate cuts on the way?

Interest rates are no longer expected to tumble this year – although Europe may move faster.

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Markets expect interest rates to be cut less swiftly and decisively this year than some observers had hoped, according to analysis from McKinsey. Many had been looking for around 6-7 interest rate cuts before the end of the year, with that expectation now being trimmed to one to two cuts.

In Europe, however, things might change faster than in the US. Although the ECB (European Central Bank) kept interest rates unchanged in April, a cut of 0.25% was agreed at the latest meeting on June 6.

This is because the ECB remains optimistic over inflation rates, which have been edging closer to the bank’s 2% target for several months now. A slight uptick from 2.4% in April to 2.6% in May hasn’t changed that optimistic outlook.

Interest rate levels are crucially important for manufacturing industries, with higher rates meaning higher finance costs that reduce the capacity of businesses to invest in modernisation or expansion. The faster the ECB can cut rates, the sooner and stronger industry can recover from the recent debilitating effects of high fuel and transport costs and above-average inflation.

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