Economy: why the European Central Bank still refuses to cut its interest rates

Economy: why the European Central Bank still refuses to cut its interest rates

1 The Central Bank in search of stability

On Thursday, March 7, ECB President Christine Lagarde did not announce her game: “We are making good progress towards our inflation target,” but “we are not confident enough” about price dynamics, the Frenchwoman stated. She assured that “we will know a lot more in June”, the horizon that markets are now setting for first rate cuts.

A priori, the price data are moving in the right direction: the ECB on Thursday lowered its inflation forecast for 2024 in the eurozone, seeing it fall to 2.3% due to the weaker impact of energy prices. The institution now expects to achieve its 2% target by 2025. The central bank wants to ensure that this trend is sustainable.

2 Excessive caution on the part of the institution?

After being divided by three between the record 10.6% of October 2022 and autumn 2023, inflation is evolving in a more hesitant manner. In February, growth slowed to 2.6%, but this decline was slightly less pronounced than expected. Under scrutiny by financial markets and the ECB, so-called core inflation, i.e. excluding highly volatile energy and food prices, fell to 3.1% in February, compared to 3.3% in January.

The ECB does not want to slacken its efforts and risk jeopardizing the effects of its unprecedented monetary tightening campaign conducted since July 2022 to control the price increase resulting from the Russian war in Ukraine. Increasing borrowing costs at an unprecedented pace has dampened demand for credit, affecting both consumption and investment by businesses and households.

The institution now expects inflation to reach its target of 2% in 2025

The downside of this policy: the eurozone economy has been stagnating for almost a year and a half and economists believe the institution is erring on the side of caution and risks jeopardizing a recovery in activity.

3 Wage increases, a concern for the ECB

Will the US central bank, which meets on March 19 and 20, draw first? President Jerome Powell was cautious on Wednesday, deeming it a priority to avoid a rebound in inflation, saying continued progress on this front “is not assured.”

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