PUSH ECB will meet next January 25 with the question in search of answers: when it starts lowering interest rates?
With the money price at 4.5% and the deposit rate at 4.00%, the central bank appears to have concluded its historic cycle of monetary tightening. Currently, Eurotower is waiting for how i 10 increases implemented from mid-2022 will affect the economy, although he already admitted in the last economic bulletin that signs of such an increase can be seen in credit demand and growth.
Policymakers are now primarily watching wage developments in the first half of 2024 to assess whether rising labor costs will prevent inflation from slowing to the 2% target.
The year 2024 promises to be very busy ECB. That’s why investors and heads of government are eagerly awaiting another meeting in January and more meetings as they bet on as Lagarde and others decide on rate cut.
The ECB and interest rates: what will happen? Predictions
According to a Bloomberg survey of economists, the European Central Bank will cut interest rates four times this year andinflation will decline faster than originally expected.
Cuts of 25 basis points each are expected to begin in June, with further cuts in September, October and December bringing the deposit rate to 3%. While that’s one step more than expected in a survey last month, it’s still more cautious than the six cuts that investors have been pricing in since April.
The January meeting should therefore confirm the current money price at 4.5% and leave it unchanged in a wait-and-see approach.
Economists now expect a faster slowdown in price growth, to 2.3% in 2024. Compared to the December survey, this is a downward revision of 0.3 percentage points. They still see a difficult path ahead as inflation accelerates again from the target level in the fourth quarter to an average of 2.1% in 2025.
The rate of core inflation, which excludes volatile components including energy and food, is lower this year but slightly higher in 2025 and remains above the ECB’s target of 2.2%.
According to the investigation, finally one recession a gradual recovery is expected in the second half of 2023, which could accelerate in the course of this year. Growth expectations were stable for 2024 and increased by 0.1 percentage point for 2025.
ECB rate cut? The mistake of acting too early
Among the latest announcements on the ECB’s policy in the coming months, that of the chief economist stands out Philip Lane. According to him, too early a reduction in financing costs could hinder the monetary policy of the European Central Bank.
Eurotower policymakers are waiting for data to confirm that inflation is slowing at a pace that will allow them to start cutting rates. However, caution remains the way forward ahead of these numbers.
In an interview with Corriere della Sera, Lane recalled this “False dawn, recalibrating too quickly can be counterproductive. Episode history high inflation tells us that if central banks try to normalize too quickly before the problem is actually solved, there will be another wave of inflation, and then another wave of interest rate hikes. It would be a much worse scenario.”.
Lagarde he said a few days ago on France 2 TV that the hardest and worst phase of inflation is probably behind us and interest rates will be cut if the ECB is confident that prices have fallen to the 2% level.
“I think rates, barring further shocks or unexpected data, will not continue to rise. And if we win our fight against inflation and if we are sure that inflation will actually be at 2%, then rates begin to fall“specified the governor.
Asked if 2024 will be the year of rate cuts, Lagarde said: “As President of the European Central Bank, I cannot give you a date”.
Those eager to see an immediate drop in the cost of money will therefore be disappointed. Everyone, including the ECB, is worried that geopolitical tensions and the winds of war will translate into a sudden rise in prices. At that point, monetary policy could remain aggressive for a long time.