The European Central Bank (ECB) has decided to cut interest rates by 0.25 points, leaving the main reference at 3.25% (the ease of depositwhich is automatically transferred to the Euribor). The monetary institution continues to ease financing conditions given the moderation of inflation in the eurozone as a whole and to breathe oxygen into the economy, especially due to Germany’s stagnation and the weakness of France’s growth.
“The disinflationary process is well underway,” says the Governing Council of the ECB in its statement this Thursday. Furthermore, in the usual press conference, the president of the institution, Christine Lagarde, has pointed out “weaker than expected economic activity”, mainly in the industrial sector, and has also cited lower household spending or the slowdown of job creation. With “downside risks” due to the threats of a drop in confidence among companies and families and the impact of Israel’s genocide on the Palestinian people of Gaza and also its attacks on Lebanon. Although the Frenchwoman wanted to clarify that the growth of the economy is not the main concern of the ECB, since its mandate is price stability.
The institution has lowered the official ‘price’ of money three times (on all occasions by 0.25 points) in this chapter of monetary austerity. The first, in June, as the beginning of the end of an aggressive cycle of increases that began in 2022 to fight inflation. The second, last month, when after a technical adjustment it left it at 3.5%.
This Thursday, the main decision-making body of the ECB has met expectations. Some forecasts (from investors and experts) that, in the longer term, have changed from one drop every quarter between now and autumnuntil reaching a level of 2% or 2.25%, at a rate of five consecutive drops to reach the same goal in spring. The next meeting of the ECB Governing Council is held on December 12, when the institution’s economists will update their macroeconomic estimates.
Price increases already moderated to 1.7% in the eurozone as a whole in September, in an interannual rate. And at 1.5% in Spain. That is, inflation is below the ECB’s theoretical target of 2%. Meanwhile, the weakness of economic activity in some countries, including Germany and France, is evident. Above all, in the industrial sector – Spain is a positive exception and leads the GDP growth among the large economies of the EU. In this context, the cheaper financing conditions is key, both for mortgaged families or for those looking for a loanas for companies that want to invest.
Of course, for now, financing conditions in the eurozone “remain restrictive,” which in monetary jargon means that they continue to hurt demand. Furthermore, the Governing Council and Lagarde maintain the mantra that their decisions “depend on the data” and that they are made “meeting by meeting.”
Not an allusion to economic growth in his statement
“Inflation is expected to rise in the coming months, before falling to target over the course of next year. Internal inflation remains high, as salaries continue to increase at a high rate,” explains the press release published by the ECB this Thursday. A text in which it does not refer at any time to economic growth, although Lagarde did do so at the press conference. The statement closes with a forceful: “The Governing Council does not commit in advance to a specific interest rate path.”
“We run the risk of approaching a tipping point, when some companies could start to stop creating jobs because the recovery is coming too slowly, and then there could be some kind of snowball effect,” Governor Martins Kazaks recently said. of the central bank of Latvia, one of the most aggressive ‘hawks’ of the Governing Council of the ECB.
Their position is important because, basically, the ‘hawks’ are the ones who most clearly assume the threat that monetary austerity will end up causing a recession, since they prioritize the moderation of inflation. In fact, more moderate voices have been warning for months that monetary policy is an ocean liner that runs the risk of crashing if it starts to turn too close to port.
In the most extreme scenario, in which rate increases have gone too far and inflation falls below 2% within a year or later, the main fear would become deflation. This is a ‘monster’ even more impoverishing than inflation because it would be linked to a recession and job destruction.
This Thursday’s interest rate cut is “a step in the right direction”, admits Positive Money. “But with business activity slowing in the eurozone and economies like Germany in decline, it is crucial to take more drastic measures,” continues this non-profit organization that works for a fairer monetary policy.
“Now that inflation is below the 2% target, the focus should shift to supporting our economies and accelerating the investments we need most, especially in the ‘green’ transition, which has been slowed by high interest rates” , highlight the Positive Money experts.
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