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<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="820" height="462" src="https://cms.cnbcafrica.com/wp-content/uploads/2024/05/Fed-and-ECB-divergence-on-rate-cuts-could-spell-trouble-for-the-euro-economist-says-820x462.jpeg" alt="" class="wp-image-482533" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2024/05/Fed-and-ECB-divergence-on-rate-cuts-could-spell-trouble-for-the-euro-economist-says-820x462.jpeg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2024/05/Fed-and-ECB-divergence-on-rate-cuts-could-spell-trouble-for-the-euro-economist-says-300x169.jpeg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2024/05/Fed-and-ECB-divergence-on-rate-cuts-could-spell-trouble-for-the-euro-economist-says-160x90.jpeg 160w, https://cms.cnbcafrica.com/wp-content/uploads/2024/05/Fed-and-ECB-divergence-on-rate-cuts-could-spell-trouble-for-the-euro-economist-says-768x432.jpeg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2024/05/Fed-and-ECB-divergence-on-rate-cuts-could-spell-trouble-for-the-euro-economist-says.jpeg 929w" sizes="auto, (max-width: 820px) 100vw, 820px" /><figcaption class="wp-element-caption">The President of the European Central Bank (ECB) Christine Lagarde gestures as she addresses a press conference following the meeting of the governing council of the ECB in Frankfurt am Main, western Germany, on April 11, 2024. Kirill Kudryavtsev | Afp | Getty Images</figcaption></figure>



The prospect of the European Central Bank diverging from the Federal Reserve on interest rate cuts is likely to be “particularly negative” for the 20-nation euro zone, according to one economist.



The ECB&nbsp;<a href="https://www.cnbc.com/2024/04/19/heres-what-12-ecb-members-said-about-interest-rates-this-week.html">appears on course</a>&nbsp;to cut interest rates in June, barring any major surprises, and&nbsp;<a href="https://www.cnbc.com/2024/04/30/euro-zone-inflation-april-2024-and-first-quarter-gdp.html">recent inflation data</a>&nbsp;has since bolstered the case for an imminent reduction in borrowing costs.



The U.S. central bank, meanwhile,&nbsp;<a href="https://www.cnbc.com/2024/05/01/fed-rate-decision-may-2024-.html">held interest rates steady</a>&nbsp;on Wednesday, with the rate-setting Federal Open Market Committee citing a “lack of further progress” in getting inflation back down to its 2% target.



The Federal Reserve&nbsp;<a href="https://www.cnbc.com/2024/05/01/fed-decision-heres-what-changed-in-the-new-statement.html">said in a statement</a>&nbsp;that it did not expect to reduce rates until it had gained “greater confidence” that inflation was moving sustainably back toward its target level, reiterating language it used after the March and January meetings.



It leaves the ECB firmly on track to cut interest rates before the Fed.



“The problem of cutting rates right now is that the ECB takes for granted the strength of the&nbsp;<a href="https://www.cnbc.com/quotes/EUR=/">euro</a>. And if they start to cut rates ahead of the Federal Reserve, that is basically giving the world a signal that the euro needs to weaken,” Daniel Lacalle, chief economist at Tressis Gestion, told CNBC’s “Street Signs Europe” on Thursday.



“And if the euro weakens, the import bill of the euro zone is going to rise, making it even more difficult for the euro area to grow.”



Lacalle said a June rate cut from the ECB was not going to make German, French or Spanish businesses take more credit “because a small rate cut is not the driver of credit demand.” Credit demand refers to the appetite for business and consumer loans.



He added, “What makes credit demand interesting, or rise, is the fact that there [are] economic and investment opportunities and those are curbed by regulation and the misguided energy policy of the euro area.”



An ECB spokesperson declined to comment when contacted by CNBC.



<h2 class="wp-block-heading" id="h-ecb-heading-toward-a-rate-cut"><a></a>ECB heading toward a rate cut?</h2>



Speaking to CNBC on last month, ECB President Christine Lagarde&nbsp;<a href="https://www.cnbc.com/2024/04/16/lagarde-says-ecb-will-cut-rates-soon-barring-any-major-surprises.html">said</a>&nbsp;the central bank remained on course to cut interest rates in the near term, subject to any additional shocks.



“We just need to build a bit more confidence in this disinflationary process but if it moves according to our expectations, if we don’t have a major shock in development, we are heading towards a moment where we have to moderate the restrictive monetary policy,” Lagarde said on April 16.



Official figures&nbsp;<a href="https://www.cnbc.com/2024/04/30/euro-zone-inflation-april-2024-and-first-quarter-gdp.html">published</a>&nbsp;Tuesday showed that prices in the euro area held steady at 2.4% in April, while the economy returned to growth over the first three months of the year.



Gross domestic product rose by 0.3% over the first quarter, slightly better than consensus economist expectations. GDP for the fourth quarter of 2023 was revised from no growth to a 0.1% contraction, which means that the euro zone was in a technical recession in the second half of last year.



Tressis Gestion’s Lacalle said one prevailing market narrative was that high interest rates in Europe were to blame for sluggish economic growth. “However, the euro zone slowdown has absolutely nothing to do with rate hikes,” he said.



Instead, Lacalle said recent economic weakness across the euro zone should be attributed to the bloc’s energy policy, regulatory measures and farming and agricultural policy.



— CNBC’s Jeff Cox &amp; Jenni Reid contributed to this report.

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<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="820" height="462" src="https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107403109-1713443463934-gettyimages-2147899569-AFP_34PP888-820x462.jpeg" alt="" class="wp-image-481532" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107403109-1713443463934-gettyimages-2147899569-AFP_34PP888-820x462.jpeg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107403109-1713443463934-gettyimages-2147899569-AFP_34PP888-300x169.jpeg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107403109-1713443463934-gettyimages-2147899569-AFP_34PP888-160x90.jpeg 160w, https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107403109-1713443463934-gettyimages-2147899569-AFP_34PP888-768x432.jpeg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107403109-1713443463934-gettyimages-2147899569-AFP_34PP888.jpeg 929w" sizes="auto, (max-width: 820px) 100vw, 820px" /><figcaption class="wp-element-caption">International Monetary Fund (IMF) Managing Director Kristalina Georgieva speaks during a briefing on the Global Policy Agenda at IMF headquarters during the IMF/World Bank Spring Meetings in Washington, DC on April 18, 2024. Mandel Ngan | Afp | Getty Images</figcaption></figure>



Kristalina Georgieva, the managing director of the International Monetary Fund, played down the prospect of any negative impact from a monetary policy divergence between Europe and the U.S., but said issues could be more acute in emerging markets.



The benchmark rates of most advanced economies soared in recent years, as central banks aimed to tame inflation following the Covid-19 pandemic. These banks are now looking to bring rates back down as economies cool off, although signals in the U.S. suggest that cuts might still be some months away.



A high U.S. interest rate environment is traditionally bad news for emerging markets, as it makes their debts — often priced in U.S. dollars — more expensive. It can also trigger capital outflows, as investors opt for better returns in the U.S., and can cause much tighter financial conditions.



“It is a much more serious issue for countries where the impact of high interest rates in the United States are more profound — in many emerging market economies,” Georgieva told CNBC’s Silvia Amaro in Brussels on Monday.



“We also see some of this in Japan, and there the attention of policymakers, indeed, has to be sharpened to carefully monitor where the volatilities are becoming more significant. In Europe, this is not the case.”



In the euro zone, she said that “we are not too worried about the exchange rate impact,” adding that the IMF’s analysis showed that the 50 basis points difference between the rates of the U.S. Federal Reserve and those of the European Central bank “is likely to lead to miniscule or 0.1 to 0.2% shift in the exchange rate.”



“And that is to say that here [in Europe] this is not a big issue,” she said.

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<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="820" height="461" src="https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107407269-1714293090268-gettyimages-1931121428-DAVOS_WEF_2024-820x461.jpeg" alt="" class="wp-image-481182" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107407269-1714293090268-gettyimages-1931121428-DAVOS_WEF_2024-820x461.jpeg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107407269-1714293090268-gettyimages-1931121428-DAVOS_WEF_2024-300x169.jpeg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107407269-1714293090268-gettyimages-1931121428-DAVOS_WEF_2024-160x90.jpeg 160w, https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107407269-1714293090268-gettyimages-1931121428-DAVOS_WEF_2024-768x432.jpeg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107407269-1714293090268-gettyimages-1931121428-DAVOS_WEF_2024-1536x864.jpeg 1536w, https://cms.cnbcafrica.com/wp-content/uploads/2024/04/107407269-1714293090268-gettyimages-1931121428-DAVOS_WEF_2024.jpeg 1600w" sizes="auto, (max-width: 820px) 100vw, 820px" /><figcaption class="wp-element-caption">Borge Brende, president of the World Economic Forum (WEF). Bloomberg | Bloomberg | Getty Images</figcaption></figure>



Borge Brende, president of the World Economic Forum, gave a stark outlook for the global economy saying the world faces a decade of low growth if the right economic measures are not applied.



Speaking Sunday at WEF’s “Special Meeting on Global Collaboration, Growth and Energy for Development” in Riyadh, Saudi Arabia, he warned that global debt ratios are close to levels not seen since the 1820s and there was a “stagflation” risk for advanced economies.



“The global growth [estimate] this year is around 3.2 [%]. It’s not bad, but it’s not what we were used to — the trend growth used to be 4% for decades,” he told CNBC’s Dan Murphy, adding that there was a risk of a slowdown like that seen in the 1970s in some major economies.



“We cannot get into a trade war, we still have to trade with each other,” he explained when asked about avoiding a period of low growth.



“Trade will change and global value chains — there will be some more near-shoring and friend-shoring — but we shouldn’t lose the baby with the bathwater &#8230; Then we have to address the global debt situation. We haven’t seen this kind of debt since the Napoleonic Wars, we are getting close to 100% of the global GDP in debt,” he said.



He said governments needed to consider how to reduce that debt and take the right fiscal measures without getting into a situation where it kicks off a recession. He also motioned persistent inflationary pressures and that generative artificial intelligence could be an opportunity for the developing world.



His warning chimes with a recent report from the International Monetary Fund which noted that global public debt had edged up to 93% of GDP last year, and was still 9 percentage points higher than pre-pandemic levels. The IMF projected that global public debt could near 100 % of GDP by the end of the decade.



The Fund also singled out the high debt levels in China and the United States, saying loose fiscal policy in the latter puts pressure on rates and the dollar which then pushes up funding costs around the world —exacerbating pre-existing fragilities.



Earlier this month, the International Monetary Fund raised its global growth forecast slightly, saying the world economy had proven “surprisingly resilient” despite inflationary pressures and monetary policy shifts. It now expects global growth of 3.2% in 2024, up by a modest 0.1 percentage point from its earlier January forecast.



WEF’s Brende said Sunday that the biggest risk for the global economy is now “the geopolitical recession that we are faced with,” highlighting recent Iran-Israel tensions.



“There is so much unpredictability, and you can easily get out of control. If Israel and Iran escalated that conflict, we could have seen an oil price of $150 overnight. And that would of course be very damaging for the global economy,” he said.

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WEF president: ‘We haven’t seen this kind of debt since the Napoleonic Wars’

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Why Fast Food Has Gotten So Expensive

Why Warren Buffett is such a big deal

Meet Synthesia’s AI avatar

Why Many Americans Still Feel Bad About The Economy Despite Strong Data

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IMF chief warns of emerging market risk with high U.S. interest rates

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Why Fast Food Has Gotten So Expensive

Why Warren Buffett is such a big deal

Meet Synthesia’s AI avatar

Why Many Americans Still Feel Bad About The Economy Despite Strong Data

Georgia rocked by protests over ‘Russian law’

Fed and ECB divergence on rate cuts could spell trouble for the euro, economist says

Here’s how floodplain buyouts work

Countries in South and Southeast Asia are feeling the heat

Why Hundreds Of U.S. Banks Are At Risk Of Failing

Fedspeak: Does The Federal Reserve Talk Too Much?

IMF chief warns of emerging market risk with high U.S. interest rates

Inside Qualcomm’s chip center in India

Biden makes another push for tuition-free community college

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WEF president: ‘We haven’t seen this kind of debt since the Napoleonic Wars’

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China’s Looming Crises | CNBC Marathon

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