ECB, inflation down to 2% in 2025. Rates, countdown to the cut
The Governing Council of the ECB is “determined to ensure the timely return of inflation to the target of 2 percent in the medium term” and future decisions will ensure “that the ECB's key interest rates remain sufficiently restrictive as long as necessary”. This is stated in the March Economic Bulletin of the European Central Bank.
“If an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further strengthen the Governing Council's confidence in a stable convergence of inflation towards the target, it would then be appropriate reduce the current level of monetary policy restriction – explain the Frankfurt experts – In any case, to determine the appropriate level and duration of the restriction, the Governing Council will continue to follow a data-driven approach, according to which decisions are defined from time to time at each meeting, without binding oneself in advance to a particular rate-setting path”.
At its meeting on 11 April the ECB decided to keep the three reference interest rates, and the new information essentially confirmed the previous assessment of the medium-term inflation outlook. “Inflation continued to decline – we read in the bulletin – driven by the more contained trend in food and goods prices. Most measures of underlying inflation are falling, the wage dynamics is gradually moderating and businesses are absorbing some of the increase in labor costs into their profits. Financing conditions remain restrictive and previously established interest rate increases continue to weigh on demand, helping to reduce inflation. However, domestic price pressures are strong and keep services inflation high.”
The ECB notes that “the economy remained weak in the first quarter of 2024”, while “economic surveys indicate a gradual recovery during this year, driven by services”. “In the coming months – we also read in the bulletin – inflation is expected to fluctuate around current levels, and then decrease until reaching the target of 2 percent next year, due to the weaker growth in the cost of work, the unfolding of the effects of the restrictive monetary policy pursued by the Governing Council and the waning of the impact of the energy crisis and the pandemic. Measures of longer-term inflation expectations remain essentially stable, hovering mostly around 2 percent”. Finally, from Frankfurt they underline that “the risks for economic growth remain oriented towards the downside.
Economic expansion could be slower if the effects of monetary policy prove stronger than expected. A weakening of the global economy or a further slowdown in international trade would also weigh on euro area growth. Russia's unjustified war against Ukraine and the tragic conflict in the Middle East represent significant sources of geopolitical risk. This could lead to a loss of confidence in the future among families and businesses and produce disruptions in international trade. Growth could be higher if inflation falls faster than expected and if increases in real income lead to larger-than-expected increases in spending, or if the expansion of the world economy is stronger than expected. Upside risks to inflation include heightened geopolitical tensions, especially in the Middle East, which could lead to higher energy and transportation costs in the short term, causing disruptions to global trade. Furthermore, inflation could be higher than expected if wages rise more than expected or profit margins remain more resilient. On the contrary – explains the bulletin – inflation could surprise on the downside if monetary policy slows down demand more than expected or in the event of an unexpected deterioration in the economic environment in the rest of the world”.
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