The European Central Bank (ECB) decided to wait for additional data before starting to talk about a potential interest rate cut, despite market expectations, at its fourth consecutive meeting. At the moment, it looks like there will not be enough fresh data for the April ECB meeting, and most likely, if nothing extraordinary happens, the first interest rate cut could be expected at the June 6 meeting. The fact that the ECB continues to keep interest rates at the levels raised last year has caused the long-term interest rates of the euro to rise slightly in recent weeks.
Long-term interest rates in the euro, in anticipation of a rate cut by the ECB at the beginning of this year, had already moved quite sharply to lower levels at the end of last year. For example, the 1-year Euribor rate dropped from 4.2% last September to 3.51% already in December. Now, seeing that the ECB is continuing, and seems likely to continue for some time, to leave euro interest rates unchanged, the 1-year Euribor rate has risen from 3.505% to 3.74% since the beginning of February. So, without the ECB changing anything, market participants lowered the 1-year Euribor by 70 basis points in 3 months and now raised it again by 20 basis points – market opinion has a lot of power.
No change in ECB interest rates means that citizens and businesses who are waiting for a rate cut from the ECB to take out a loan are forced to wait again. On the other hand, for those who already have loans, the behavior of interest rates in the market has been favorable since October of last year, as the Euribor interest rates of all terms widely used in lending are below the ECB deposit rate (4%). In addition to this positive effect, April and the offset of first quarter mortgage interest payments are getting closer.
Inflation down, economic activity – also
Four times a year, the ECB publishes its GDP and inflation forecasts, and this time there were once again corrections. Inflation indicators for 2024 have been adjusted considerably downwards – inflation in 2024 will be 2.3% on average, but further corrections will be minimal – 2.0% in 2025 and 1.9% in 2026.
Worse news for economic growth. ECB specialists have lowered the GDP forecast for 2024 to 0.6% and expect that the growth of economic activity will remain weak in the near future. For 2025, the GDP is predicted to rise to +1.5% and in 2026 to +1.6%.
The amount of money available for consumption is unchanged, purchasing power has decreased
The latest Latvian retail sales data show that there was a decrease in volumes in January compared to January of the previous year. Such data confirm the situation observed in bank accounts, because you can spend either what is in the account or what you can borrow. According to the data of the Bank of Latvia, household deposits did not change significantly during the year in January (with a small minus in the third decimal place). This means that the amount of money available for consumption has not increased, but the purchasing power has decreased due to the still positive inflation. However, looking at salary changes in Latvia and comparing them with inflation, the picture is more positive and salary growth is currently well ahead of the inflation rate. It should be noted that the situation in the account is different for each resident and one of the growing problems in Latvia is stratification – the distribution of money among residents is very disproportionate.
The ECB leadership will decide on interest rates again on April 11 in Frankfurt, while the next meeting of the US FRS will be on the 19/20. in March.
Illustration 1. Changes in Euribor interest rates of different maturities and ECB deposit interest rates since January 2023.
Illustration 2. History of changes in the base interest rates of some of the world’s central banks.
Illustration 3. Euro ECB deposit rate, 3-month Euribor and 5-year interest rate.
Illustration 4. Latest ECB GDP and inflation forecasts (together with historical forecasts).
Illustration 5. Changes in deposits of Latvian households and companies during the year until January 2024.
Illustration 6. Annual inflation history in the euro zone and Latvia until January 2023.
2024-03-11 09:35:22
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