NAccording to the assessment of the head of the Austrian central bank, Robert Holzmann, there are no plans to cut key interest rates by the European Central Bank (ECB) in the coming year. “But even though we have had ten uninterrupted interest rate increases, a series of increases that is unprecedented in the history of the ECB, there is still no guarantee of interest rate cuts for 2024,” said Holzmann, who is also a member of the ECB Council Thursday on the website of the Austrian National Bank (OeNB).
The continued interest rate increases this year are part of a normalization after the low interest rate era. “This monetary policy normalization is already having an effect in the decline in inflation, but it would be premature to think about interest rate cuts now,” said Holzmann.
“In the euro area, we will probably reach our target of 2.0 percent inflation within the next two years, although the path there will still be challenging,” Holzmann continued. “Fighting inflation is like running a marathon – the last few meters are the most difficult.” ECB Executive Board member Isabel Schnabel recently used similar formulations about the last stage.
The Austrian Holzmann is one of the “hawks” on the ECB Council who, in contrast to the “doves”, tend to pursue a tight monetary policy. Bundesbank President Joachim Nagel also recently warned that victory over inflation should not be celebrated too early. This had sometimes gone wrong in the past.
What's next for inflation?
ECB boss Christine Lagarde had not recently given any signals for a rate cut, but had not explicitly ruled it out either. “We didn’t talk about interest rate cuts at all,” Lagarde said after the latest ECB Governing Council meeting. This was perceived as rather unusual. However, interest rate cuts are expected on the financial markets next year. The background is falling inflation rates and weak economic development in the euro area.
The ECB is also curbing speculation about future interest rate cuts on the financial markets because these are already causing long-term capital market interest rates to fall and thus making it more difficult to combat inflation. The inflation rate in the euro area fell significantly in October and November to 2.4 percent. But things probably didn't go on like this in December. The statistical offices do not want to publish the inflation figures for 2023 as a whole until the new year. The ECB's target is an inflation rate of 2 percent.
Marco Wagner, ECB observer at Commerzbank, looked at the question of how inflation is likely to continue in the new year. Under the title “Inflation – is that it?” He writes that if you project the movement of the inflation rate from the past few months forward, the time of high inflation seems to be over soon. However, he raises concerns and refers, among other things, to the prices from the insurance industry, which are typically increased at the turn of the year, as well as to the wage agreements, some of which are due in the first half of 2024 and could in turn have an impact on inflation.
Commerzbank chief economist Jörg Krämer warns against a hasty reversal by the ECB: “An early relent by the ECB carries the risk that inflation will ultimately settle at a level that is too high and the ECB will be forced to resume its interest rate increases in order to restore its credibility. “
What happens if interest rate cuts don't come anytime soon?
The central bank left its interest rates unchanged in October and December. The ECB deposit rate that banks receive for their deposits with the central bank, which also has certain effects on savings interest rates, is 4 percent. The main refinancing rate that banks have to pay for loans from the central bank remains at 4.5 percent. And the top refinancing rate for banks' overnight loans remained at 4.75 percent.
Ulrich Stephan, Deutsche Bank's chief investment strategist for private and corporate customers, has warned that it could cause unrest on the financial markets if it turns out that interest rate cuts are not coming quickly. “I think the expectations of such a looser monetary policy are exaggerated,” said Stephan. Accordingly, there could be a risk of disappointment for the markets. This applies to both the bond and stock markets.
“The markets have anticipated these significant interest rate cuts in the past few weeks and have caused price gains for both bonds and stocks,” said Stephan: “If there is a correction, investors should take advantage of the opportunity and enter the market.”
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