June 2024 | On 6 June 2024, the European Central Bank (ECB) took a decisive step by cutting its key interest rate by 0.25 percentage points to 3.75%. This adjustment, the first since 2019, ends an extended nine-month period in which rates have been held at 4%. While this cut is aimed at easing some of the financial pressure on critical steel-consuming sectors such as construction and automotive, analysts at MEPS predict that the impact on the steel industry will not be immediate.
The ECB decision is part of a wider attempt to stimulate economic activity across Europe, where the steel industry has been particularly sluggish. According to recent surveys conducted by MEPS International for its European Steel Review, many industry insiders had anticipated that lower borrowing costs could boost economic confidence and, in turn, steel demand. However, the consensus remains cautious; the subtle reduction in interest rates is seen as a step in the right direction, but is not expected to rapidly change market dynamics.
However, MEPS market analyst Jonathan Carruthers-Green said that those expecting an immediate uptick in activity following the interest rate cut will be disappointed. Carruthers-Green described the step as “welcome news”, but added: “It is only a small reduction in the headline rate.“ It could take up to nine months for any positive effects to be felt by the steel industry.
“Our most recent conversations with market participants show that the recent lull in activity is likely to continue. Market sentiment may be marginally higher than in May, however demand and prices both remain weak.”
Steel Industry Facing Persistent Inflation
At the same time, the ECB highlighted some improvements in the broader economic landscape, particularly with regard to inflation. Since the last major meeting of the Governing Council in September, the rate has fallen significantly by more than 2.5 percentage points. Despite these positive signs, inflation is expected to remain above the ECB’s 2% target well into next year. This persistent inflationary pressure poses an ongoing challenge and keeps the economic outlook cautious and full of uncertainties.
The ECB expects headline inflation to average 2.5% in 2024, before declining slightly in the following years. Core inflation, which strips out volatile items such as energy and food, is also expected to gradually normalise. This slow and steady approach is reflected in the forecast for economic growth, which is expected to pick up slightly over the next few years.
As the European steel industry navigates these complex economic currents, the ECB’s recent interest rate cut offers a glimmer of hope. However, it is clear that the road to recovery will be gradual and the sector will have to brace itself for a further period of adjustment before it sees a significant revival in demand and activity. The steel industry, which is central to Europe’s industrial fabric, thus remains at a crossroads, waiting for more robust signals of economic stabilisation and growth.
(Source: MEPS/2024)
