ECB
The European Central Bank sees no reason yet to lower interest rates and is keeping the deposit rate at 4 percent. There is no absolute certainty yet that the inflation monster has been defeated.
In one year, inflation in the eurozone has fallen from 6.9 percent to 2.4 percent. The interest rate increases by the European Central Bank (ECB) have done their job. The deposit interest rate has been increased in ten steps to 4 percent since the summer of 2022. But now that inflation is gradually falling, interest rates can go down again. The only question is when the moment will come.
The fact that it is still too early is evident from, among other things, inflation in the services sector. It is still 4 percent. This is mainly a result of wage increases, because services are much more labor intensive than industry. The fact that inflation is close to the target of 2 percent is mainly due to the rapidly falling energy prices. But because these depend on external factors, such as weather and geopolitics, they can cloud the broader macroeconomic picture.
June then?
Almost all analysts agree that the next meeting, in June, would be an excellent time to cut interest rates. Inflation will then probably have fallen a little further, and there will also be more certainty about the economic situation. After all, keeping interest rates at 4 percent for too long can slow down growth.
The ECB itself has already hinted that June could be the time for the first interest rate cut. The bank then has more detailed data that map out wage developments. This way, bankers have more insight into the factors that influence inflation.
“We expect Christine Lagarde to confirm her earlier hints about a rate cut in June as inflation in the eurozone moves in the desired direction,” Luc Aben, chief economist at asset bank Van Lanschot Kempen, wrote in a note. “Given the current subdued economic momentum, we expect inflation to decline further towards the central bank’s target. The only thing that may stand in the way of monetary easing is persistent wage pressure. Despite the moderate economic growth, the labor market remains tight.”
The bond markets have also adjusted their expectations. Investors now expect eurozone interest rates to be cut by 0.25 percentage points three times this year. The interest rate would therefore be 3.25 percent at the end of this year.
