The era of record interest rates in the eurozone could soon be over. The continued decline in inflation in the community of twenty countries is likely to put increasing pressure on the ECB’s monetary authorities to translate the monetary policy shift into interest rate cuts in the coming months – much sooner than actually expected.
The deposit rate is currently 4.00 percent and the policy rate is 4.5 percent. Economists expect the ECB to hold its feet again at Thursday’s interest rate meeting in Frankfurt and not shake key interest rates, but experts expect a lively discussion about when the right time for the interest rate turnaround will be.
Debate becomes ‘fiercer than ever’
“Given the further decline in inflation and the still weak economy in the eurozone, the debate on interest rate cuts at the ECB meeting on March 7 will be fiercer than ever,” said ING chief economist Carsten Brzeski. All eyes would also be on any changes in communications from the monetary authorities and any indication of their next steps.
In February, consumer prices in the eurozone had risen by only 2.6 percent in a year. Inflation was 2.8 percent in January and 2.9 percent in December. This means that the ECB’s target of 2.0 percent inflation is increasingly within reach.
Price pressure surprisingly lower
At next week’s meeting, monetary authorities will also be presented with new inflation and economic forecasts from ECB economists. These forecasts, published quarterly, are considered an important decision factor for the monetary authorities. “As price pressures in the first quarter are likely to be lower than expected in the ECB projections, the inflation estimate for the full year 2024 is likely to be revised slightly downwards,” estimates DZ Bank analyst Christian Reicherter.
The December projections estimated inflation of 2.7 percent for 2024. The economists at the American bank Morgen Stanley expect a new forecast of 2.3 percent.
High wages are a concern for monetary authorities
From the perspective of ECB President Christine Lagarde, inflation in the eurozone will continue to weaken. The effects of previous shocks that pushed up inflation would fade. And tight financing conditions are helping to reduce inflation, she said recently in the EU Parliament.
However, euro watchdogs are still concerned about high wage pressures. “Despite the weaker economy and gradually weaker labor market, wages remain the biggest risk to the inflation outlook,” said Jörg Krämer, chief economist at Commerzbank.
An important milestone is in May
In recent weeks, some monetary authorities have indicated that wage data from new collective bargaining agreements in euro area countries will not be available until May. These data are considered an important milestone for the ECB to estimate how inflation will develop in the current year.
“We expect Ms Lagarde to stick to the well-rehearsed script that the ECB must be careful and cautious and wait for the crucially important first quarter wage growth data before it can start cutting rates,” said Andrzej Szczepaniak, Europe’s Economist at the ECB. Japanese bank Nomura.
Source: Krone
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
