ECB
Eurozone interest rates will remain what they are for the time being. This buys the ECB time. Inflation rates have not yet fallen enough to justify a reduction.
The deposit rate in the eurozone remains at 4 percent. That level has been unchanged for almost six months. There is therefore no need to fear reductions in savings interest rates for the time being.
In the past, ECB President Christine Lagarde has clearly set out the most important condition for an interest rate cut. The inflation figures must show an unmistakable downward trend towards 2 percent. That condition has not yet been met. In February, eurozone inflation rose from 2.8 to 2.6 percent. That figure is lower than the previous month, but higher than in November. The trend is therefore far from clear, let alone that the 2 percent is already in sight.
Moreover, there are other elements that indicate that inflation is persistent. Food and services are still 4 percent more expensive than a year ago. The decline is mainly due to the falling energy price. More is needed for a real structural improvement.
On the other hand, the eurozone economy is suffering from high interest rates. There was hardly any growth in the past two quarters. At these interest rates, much less is borrowed for, for example, construction or investment projects. As a result, companies have less to do.
If the ECB keeps interest rates high for too long, it threatens to cripple the economy. However, Lagarde and her team will prefer this to cutting interest rates too quickly. After all, curbing inflation is the central bank’s priority goal. If the bank cuts too quickly, the 2 percent target could become even further away. Then new increases would be the only option. Such a zigzag policy is a nightmare scenario for central bankers. Especially because the ECB had initially underestimated the inflation threat.
The ECB repeatedly emphasized that interest rate adjustments will only be made if economic figures are reassuring enough. On Thursday, the bank’s research department released new figures: inflation expectations have been lowered, but estimates of economic growth have deteriorated. Moreover, Lagarde indicated that she mainly wants to gain more insight into the mechanisms behind wage determination. After all, it is seen as an important driver of inflation. The wage increases that are intended to compensate for the loss of purchasing power make an interest rate reduction more difficult. On Thursday afternoon, Lagarde will explain the discussions that the Board of Directors has had. But it is expected that she will keep her cards close to her chest.
“We expect a neutral attitude and balanced communication, which takes into account the improved inflation figures but which will avoid declaring victory too early,” ECB watcher Frederik Ducrozet of asset manager Pictet told Reuters.
