Amidst the global economic flux, the European Central Bank (ECB) made a significant decision on September 12, 2024: to cut interest rates.

This decision, akin to a bombshell, elicited a strong reaction in the global economic environment and financial markets.

On the local time of the 12th, the ECB, headquartered in Frankfurt, Germany, decided to lower the deposit facility rate by 25 basis points to 3.5%; the refinancing rate by 60 basis points to 3.65%; and the marginal lending facility rate by 60 basis points to 3.9%.

This marks the second rate cut by the ECB since June this year.

In June 2024, the ECB lowered all three key interest rates by 25 basis points, the first cut since the cessation of rate hikes in October last year.

In July, the ECB decided to keep the three key interest rates in the Eurozone unchanged.

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Here's an explanation of the three interest rates adjusted by the ECB this time: The latest move by the ECB is not a simple one when viewed in the context of the current global economic environment and financial markets.

Moreover, following the announcement of the ECB's rate adjustment, several intriguing and noteworthy changes have occurred in the global financial markets.

At the same time as the ECB officially announced the rate cut, the core inflation forecast for 2024-2026 was adjusted from 2.8%, 2.2%, and 2% in June to 2.9%, 2.3%, and 2%, respectively, and the economic growth forecast for 2024-2026 was revised downward from 0.9%, 1.4%, and 1.6% in June to 0.8%, 1.3%, and 1.5%, respectively.

It can be seen that the ECB's inflation forecast for 2024-2025 has increased, all above 2%; while the economic growth forecast was reduced by 0.1 percentage points.

This detail implies that the current focus on the economic fundamentals is significantly higher than on inflation, which is consistent with the Federal Reserve (contrary to Japan), meaning that the ECB's rate cut also has a preemptive flavor, with increased concerns about the economic fundamentals.

According to the ECB's announcement, the deposit facility rate (used to guide the monetary policy stance) was lowered by 25 basis points to 3.5%.

The ECB's Governing Council stated that, based on the latest assessment of the inflation outlook, underlying inflation dynamics, and the transmission of monetary policy, it is time to take measures to alleviate the degree of monetary policy restrictions.

Interest rate cuts are an important tool for price-based monetary policy control and also a significant economic signal.

So, why did the ECB choose to cut rates again this year?

In fact, in the face of the current complex international political and economic situation and the ongoing slowdown in global economic growth, the ECB is not the first to cut rates this year.

A day before the ECB announced the rate cut in June (June 5, 2024), the Bank of Canada took the lead in the G7 group to cut rates, lowering the benchmark rate from 5% to 4.75%.

Undoubtedly, behind the ECB's decision to cut rates is a comprehensive consideration of the global economic environment, inflation rates, and Eurozone economic growth.

Against the backdrop of slowing consumer price growth in the Eurozone, the latest economic data has strengthened the ECB's confidence in cutting rates.

The ECB's timely rate cut is expected to reduce the interest rate differential between the Eurozone and other major economies, enhance the Eurozone's economic competitiveness, cope with the complex and changing external environment, and further alleviate inflationary pressures.

Of course, these are all superficial trends and reasons.

In reality, Europe, which is essentially aligned with the United States in financial policy and value stance, is making a preemptive rate cut just before the Federal Reserve is about to officially cut rates, which is quite intriguing.

Compared to the ECB's clear interest rate path, the Federal Reserve's ambiguous stance has often been criticized by the market.

From the perspective of the world's hegemon, the United States, it certainly wants to continue maintaining a "high-interest-rate alliance" and then keep a strong dollar to continue exerting pressure on countries and economies outside the alliance, creating opportunities for harvesting.

Although the ECB's rate cut is in line with expectations, the asymmetric rate cut adopted in the operation, with different cut margins for the lower and upper limits of the interest rate corridor, significantly lowered the upper limit of the interest rate corridor and the target rate.

Therefore, the actual rate cut margin is quite large, which to some extent indicates that the ECB is quite conflicted in its attitude towards rate cuts.

Looking at the ECB's rate cut trend itself, the economic risks and pressures in Europe may not be optimistic.

The Eurozone's economic growth continues to be sluggish, especially the performance of its largest economy - Germany, which is worrying.

Germany, known as the "engine" of the European economy, has recently sounded the alarm for recession.

Data shows that Germany's GDP decreased by 0.1% quarter-on-quarter in the second quarter, with both private consumption and investment declining.

What's more worrying is that the German IFO Institute has significantly lowered its economic growth forecast for Germany in 2024 from 0.4% to 0%.

This means that the "engine" of the European economy may have already stalled.

It's not just Germany; the economic vitality of the entire Eurozone is weakening.

The Eurozone's manufacturing PMI in August was 45.8, which has been in a contraction range for several months.

These data all show that high interest rates are suppressing the economic growth of the Eurozone.

In addition to weak economic growth, the decline in inflation levels has also created conditions for the ECB to cut rates.

The overall inflation rate in the Eurozone in August decreased by 2.2% year-on-year, hitting a three-year low, close to the ECB's 2% target.

However, it is worth noting that the core inflation rate is still at a relatively high level of 2.8%.

This means that the ECB still needs to be cautious when cutting rates to prevent a rebound in inflation.

It is clear that Europe, which is essentially aligned with the United States, has reached a critical value in the pressure and risks it has borne in the process of cooperating with the Federal Reserve's high-interest-rate strategy.

If the rate cut in June still had a certain possibility of being a strategic smoke bomb, then the ECB's rate cut again this year can actually explain a lot of issues.

After the ECB's rate cut announcement, it has had a direct impact on the global financial and monetary fields: In the secondary market, European major stock indices have all risen after the ECB announced the interest rate decision.

The prices of gold and silver have risen sharply.

As of the close on the 12th, international spot gold reported at $2558.6 per ounce, up 1.88% during the day; silver spot reported at $29.86 per ounce, up more than 4% during the day.

International crude oil prices have also risen rapidly.

As of the close on the 12th, Brent crude oil rose by 2.18%, reported at $72.15 per barrel, and WTI crude oil rose by 2.33%, reported at $67.3 per barrel.

The euro-to-US dollar exchange rate has also risen.

As of the time of writing, the exchange rate has stabilized around 1.107.

European stock indices have generally risen.

Among them, the most noteworthy is the significant surge in gold prices behind which the sentiment of risk aversion is heating up.

As of 1 a.m. on September 13, Beijing time, London gold spot hit a new historical high of $2555 per ounce.

At the same time, spot silver rose by 4% during the day, now reported at $29.81 per ounce.

International oil prices continue to rise, with the US oil contract for October expanding its increase to 3%.

Who is the driving force behind the international gold price?

The expectation of the Federal Reserve's rate cut is one of the important drivers pushing up gold prices.

After a series of weak US economic data were announced, investors' demand for gold as a safe-haven asset increased.

Against the backdrop of increasing uncertainty in the global economic outlook, gold is seen as a key asset to hedge against inflation and economic volatility.

Wind data shows that as an investment hot spot this year, London gold spot has risen more than 23% year-to-date, rising from $2062.599 per ounce at the end of last year.

As the Federal Reserve's September interest rate meeting is approaching, will gold continue its current upward trend?

Let's look at a set of historical data.

Wind data shows that in the three rounds of rate cuts since 2000, gold has risen significantly, with increases of 29.48%, 16.43%, and 35.14%, respectively.

It can be seen that compared to major asset classes, gold is the best investment in the Federal Reserve's rate cut cycle.

For the future market, Goldman Sachs pointed out in its latest report that gold is expected to continue its record-breaking rise into 2025.

Recently, Bank of America estimated that gold prices may rebound to $3000 in the next 12-18 months.

It is clear that the global smart and sensitive capital has started a new round of risk-avoiding actions through the ECB's rate cut trend.

From this perspective, the ECB's intention to save the economy by cutting rates, which is on the table, actually sends a signal to global capital and savings that is not so beautiful.

Shouldn't the rate cut by the leading economies be good news?

So what are these capitals afraid of?

US non-farm data and inflation data are key indicators that affect the Federal Reserve's rate cut.

With the recent release of a series of heavy reports, the Federal Reserve's rate cut margin has gradually become "clear".

In the evening of September 12, Beijing time, the US Department of Labor's data showed that the US August PPI increased by 1.7% year-on-year, the lowest since February; increased by 0.2% month-on-month, higher than the expected 0.1%; the US August core PPI increased by 2.4% year-on-year, in line with expectations, and consistent with the previous value; increased by 0.3% month-on-month, higher than the expected 0.2%.

This set of data was interpreted by the market as the US inflation being roughly stable within the year.

The US non-farm data released the week before was also considered to be "weak but not declining" overall.

The market generally believes that these data have set the tone for a small and gradual rate cut by the Federal Reserve.

The probability of the Federal Reserve cutting rates by 25 basis points in September is increasing.The Federal Reserve has already provided enough certainty regarding its rate cut actions; it's just a matter of whether it will be 25 basis points (BP) or 50 BP.

The expectations management has been fulfilled, and this well explains the logic behind the continuous rise in gold prices following each round of rate cuts by the Fed.

The situation in China is more nuanced.

As Europe and the US lower their interest rates, it implies a reversal in global liquidity.

Previously, developed economies continuously raised interest rates to suppress inflation, leading to an inversion of interest rates between China and the US.

This caused a significant outflow of domestic capital for arbitrage transactions: borrowing at low interest rates domestically and depositing in US dollars abroad, as well as traders being reluctant to convert their earnings into RMB due to its depreciation and lack of interest.

It's more profitable to hold US dollars and earn a 5% return from short-term deposits.

As a result, foreign trade is not generating foreign exchange, putting immense pressure on the exchange rate.

The domestic central bank has been cautiously managing this situation.

To promote the internationalization of the RMB, it must first ensure exchange rate stability, so under these unfavorable conditions, it has been reluctant to lower interest rates.

This year, the LPR rate was reduced by 25 basis points for the 5-year term at the beginning of the year, and by 10 basis points for both the 1-year and 5-year terms in July.

The rate cuts are far from sufficient.

Image Source: Internet The current market focus is on whether the People's Bank of China will adjust the LPR rates after the Fed's rate cut next week.

According to previous press conferences, there is room for reserve requirement ratio (RRR) cuts, but interest rate cuts are constrained.

It seems that the probability of a RRR cut is higher than an interest rate cut.

Currently, besides the China-US interest rate differential, there is also the issue of the banks' net interest margin.

That is to say, to lower the LPR rate, the deposit rate must be further reduced.

From the perspective of China's financial management seeking a stable style, the next step is to look forward to a RRR cut, and in terms of interest rates, it is likely to maintain a relatively stable and continuous "I am the master" style.

Of course, this also reduces the possibility of adjusting the existing mortgage interest rates.

In the current situation, as the world is about to enter a new round of easing cycle, if both the US dollar and the euro start to lower interest rates, the pressure of interest rate differentials will become smaller.

Then, the exchange rate will mainly reflect the game of economic fundamentals, that is, whoever has a better economy, the stronger the exchange rate.

Therefore, to maintain long-term exchange rate stability, the economy must be stabilized now.

Next, it is worth looking forward to domestic policies that stimulate and boost the economy.

The global and macro-level analysis and discussion ultimately need to return and focus on individual micro-perspectives to see some connections and impacts.

The European Central Bank's second interest rate cut this year reflects the weakness and risks of the European economy, which is not much in dispute.

So, for China as a country and individuals and industries in the domestic economic environment, what kind of inspiration and conclusions should be drawn?

At the end of the article, based on the above trends and discussions, I would like to share a few personal thoughts and views, which may not be correct, but can be used as a starting point for discussion and reference: First, after the second round of interest rate cuts in Europe this year, it is a direct benefit to China's foreign trade.

The logic of lowering interest rates to start restocking is very realistic.

China's foreign trade is expected to gain more demand support and orders from Europe in the coming period; secondly, according to the current actual interest rate situation between China and the US, it is necessary to reduce expectations for the capital inflow brought by the Fed's interest rate cut and its positive impact on China's domestic economy.

Under the 3% interest rate differential between China and the US, if the Fed squeezes out a 25 BP, 50 BP for the first interest rate cut, then the dollar interest rate differential effect still exists, and before the China-US interest rate differential reverses, the initiative is still in the hands of the Fed.

Then, do not have too much expectation and illusion for the downward trend of domestic interest rates, and the actual significance is not great.

It is necessary to actively stay away from the hype of the global interest rate cut cycle.

Finally, for the domestic economy, pay close attention to the changes in the yield of government bonds.

If the downward trend of the yield of government bonds has not been clearly reversed, maintaining stability and cash is king is the most reliable strategy for the vast majority of ordinary individuals and industries, without exception.