A drop to 3.25%?
“A drop is very likely” during Thursday’s ECB meeting, after a first drop in June, and a second in September, “and it won’t be the last,” said the Bank’s governor. of France, pointing to a further drop of 0.25 percentage points. The ECB’s deposit rate, which serves as a benchmark for credit conditions in the economy, would thus increase to 3.25%.
“I am quite open to the idea of thinking about the possibility of taking a further step on rates,” said his Bundesbank counterpart in a podcast with German media Table Media. “The evolution of inflation is part of the good news, we are clearly getting closer to our objective of 2% inflation” on an annual basis.
Turnaround
A reduction this week, during the ECB meeting to be held in Ljubljana, Slovenia, would constitute a turnaround. Until a month ago, the guardians of the euro remained cautious on the subject, giving the feeling of wanting to wait for their December meeting, the last scheduled for this year, to act.
But inflation continued to slow in September, falling to 1.8%, below 2% for the first time in more than three years. The slowdown is especially seen in the large economies, in Germany (1.6%), France (1.2%) and Italy (0.7%).
Additionally, core inflation, a widely followed indicator that excludes volatile energy and food prices, fell to 2.7% year-on-year, according to Eurostat.
Current price developments “reinforce our confidence that inflation will return to target in due time” and this will be “taken into account at the next monetary policy meeting” in October, said the president of the ECB, Christine Lagarde, during a notable hearing at the end of September at the European Parliament.
Activity at half mast
The minutes of the ECB’s September meeting also showed concerns about growth in the euro zone, a development likely to further reduce inflation and therefore favorable to a more rapid loosening of the monetary stranglehold. The German government has just revised its growth forecasts downwards, once again counting on a recession this year in the largest European economy (decline of 0.2% in gross domestic product) after a contraction of 0.3% in 2023.
A drop in rates would provide a breath of fresh air to households and businesses, likely to support consumer credit, the real estate market – currently sluggish – or investments.
The ECB sharply raised its rates in the wake of the post-Covid-19 recovery and then the Russian war in Ukraine, which caused energy prices to soar. This came at the cost, however, of a sharp slowdown in economic growth.
She will continue to monitor the impact of tensions in the Middle East, which tend to push up oil prices. The potential impact of the latest Chinese recovery plan could also stimulate energy demand and therefore affect prices.
