Optimistic that the ECB is winning the inflation battle, which will allow it to proceed with its first rate cut in June, the head of the EU central bank, Christine Lagrand, appeared today after the Governing Council meeting which decided to keep unchanged interest rates.
“We are not triumphant and we are not celebrating at the moment” he said characteristically, adding that “the data we have at our disposal shows that not only has inflation decreased but also that we have entered a phase of disinflation, which may not be straight line, however, it appears that we will achieve our goal in 2025. This development confirms the correctness of the monetary policy we are following. In this context, we will continue to closely monitor new data each time before making interest rate decisions.”
As for when the ECB will start cutting interest rates, Christine Lagarde reiterated that at the next meeting of the Governing Council, in June, there will be much more data available than only on the evolution of inflation but also her new macroeconomic forecasts Central Bank. As they themselves revealed, most of the central bankers participating in the ECB’s Board of Directors agreed that the decisions should be taken in June, while a few of them were in favor of “here and now”.
After all, as stated in today’s ECB decision, “if our updated assessment of the outlook for inflation, the dynamics of underlying inflation and the strength of monetary policy transmission further strengthen our confidence that inflation is converging towards our target with sustained way, then it will be possible to start easing monetary policy.”
It is noted that today the Governing Council took the decision to keep interest rates unchanged for the fifth consecutive meeting as incoming information broadly confirmed its previous assessment of medium-term inflation.
Regarding the course of inflation in particular, it is noted that inflation continued to decrease, driven by lower inflation in food and goods prices. Most measures of underlying inflation are falling, wage growth is gradually moderating, and businesses are absorbing some of the labor cost increase in their profits. Financing conditions remain tight and past interest rate hikes continue to weigh on demand, helping to dampen inflation. However, domestic price pressures are strong and are keeping service price inflation high.
Regarding developments on the growth front, the ECB estimates that the economy remained weak in the first quarter of the year. While the services sector appears resilient, manufacturing firms face weak demand and output remains sluggish, especially in energy-intensive sectors. Surveys show a gradual recovery during this year, with “steam engine” services. This recovery is expected to be supported by rising real incomes, as a result of lower inflation, rising wages and improved terms of trade.
In addition, euro area export growth is expected to accelerate in the coming quarters as the global economy recovers and spending shifts further towards tradables.
Finally, monetary policy should exert less of a burden on demand over time.
The unemployment rate is at its lowest level since the start of the euro. At the same time, labor market tightness continues to gradually ease, with employers posting fewer vacancies.
The ECB has once again called on governments to start gradually withdrawing energy-related support measures so that deflation can proceed in a sustainable manner. Furthermore, the full and prompt implementation of the revised EU economic governance framework will help governments to reduce fiscal deficits and public debt ratios to sustainable levels.
Source: RES-MPE
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