The European Central Bank kept the cost of borrowing at the current level during its fourth meeting, but at the same time, new economic forecasts could become a kind of base of argument to justify the expediency of the financial regulator’s decision to start lowering interest rates in 2024.
Analysts showed impressive coherence of opinion in the context of expectations regarding the deposit rate. They believed that the ECB would not adjust the corresponding indicator and would leave it at a record high of 4%. Currently, many European officials say that the present moment is inappropriate for the final declaration of the results of the fight against the rising cost of goods and services. In their opinion, it is too early to make statements about victory over inflation. At the same time, the dynamic of rising costs of goods and services in Europe is approaching the 2% target.
The Federal Reserve and the Bank of England are still exploring the prospects for monetary policy easing. These financial regulators have not yet made final decisions on the most appropriate timing for the start of interest rate cuts. Amid the uncertainty of the Federal Reserve System and the Bank of England, ECB President Christine Lagarde is also in no hurry to take any actions related to monetary policy easing.
Investors and economists are demonstrating agreement that the EU financial regulator should not take concrete measures to ease monetary policy until the summer. Currently, the main discussion regarding the expected lowering in interest rates is related to the potential pace of the corresponding process. Economists and investors have different estimates of the rate of reduction of the mentioned indicator and do not have a common opinion on the level at which the corresponding figure will stop in the framework of the implementation of the monetary policy easing strategy. It is worth noting that the economies of 20 eurozone countries are still in a stagnation zone. This reality corrects optimistic expectations to some extent, making the corresponding sentiment more restrained.
On Thursday, March 7, the ECB Governing Council said that the cost of borrowing at 4% over a long period will make a significant contribution to the return of inflation to the 2% target.
Christine Lagarde said that there is currently a certain slowdown in the growth rate of the cost of goods and services. At the same time, she noted that so far there is not enough confidence needed to start lowering interest rates. According to her, the financial regulator needs more evidence and details about the current state of the economy to decide on easing monetary policy. The relevant statements were made on Thursday in Frankfurt am Main during Christine Lagarde’s conversation with journalists.
The ECB president also said that the data needed to decide on further dynamic interest rates will be received in the next few months. She noted that in April the financial regulator will know more, but in June the understanding of the situation will be more extensive.
Traders increased their bets on monetary policy easing after the statements of the ECB president. They expect interest rates to be cut by one percentage point this year. Until Thursday, traders assumed that the corresponding indicator would be lowered by 93 basis points. The euro exchange rate fell by 0.2% to 1.0874 US dollars on the background of news from the ECB. The yield on Germany’s 10-year debt declined by six basis points to 2.26%.
The ECB forecast provides that this year the average inflation rate in the EU will be 2.3%. In December, the corresponding figure was 2.7%. The ECB also expects inflation to reach 2% next year. Moreover, the financial regulator, predicts that the European economy will show growth of 0.6% this year. The previous version of the ECB forecast provided for an increase in the mentioned indicator by 0.8%.
The statement from the financial regulator notes that the Governing Council will continue to adhere to a data-driven approach when deciding on the level and duration of restrictions. The ECB also notes that most underlying inflation indicators have decreased, but pressure on domestic prices continues to be high, partly due to significant wage growth. Most officials of the financial institution still agree that interest rate cuts should begin in June. They say that quick action in this case is impractical since the European economy is still struggling with stagnation, which has been the dominant trend for this region for more than a year.
Last week, Italian Finance Minister Giancarlo Giorgetti said that lowering interest rates could be a factor in stimulating economic growth, which is low throughout Europe, noting that, in his opinion, he is not the only supporter of this point of view.
In February, European inflation was recorded at 2.6%. This level exceeds the preliminary expectations.
As we have reported earlier, Jerome Powell Says Fed Needs More Confidence on Inflation to Cut Rates.
