The European Central Bank (ECB) is expected to leave key interest rates unchanged next Thursday, January 25, with interest in the meeting turning to whether its president, Christine Lagarde, will give any further indication of when to cut them.
ECB President Christine Lagarde had avoided making any mention of a rate cut following the previous meeting in December, saying it was too early to do so and that decisions would be made on the basis of data on the path of inflation and economy in general.
However, last Wednesday, Lagarde said a summer rate cut was likely when asked on the sidelines of the World Economic Forum in Davos whether she would then have the necessary majority to support such a move. He added, however, that there is still a level of uncertainty as there are individual price indices that have not fallen to the desired level.
Defying expectations for a decrease in April
With this statement, the president of the ECB denied investors’ expectations that the first interest rate cut will take place in April and will be followed by a series of similar moves in the coming months. Markets were discounting that the total rate cut in 2024 would exceed 150 basis points, meaning that there would be a total of six cuts of around 25 basis points. each one.
After Lagarde’s rebuttal, they “picked up” their forecasts somewhat, but once more gave an 80% chance of the first move in April, while expecting a total decrease of 138 bp. in 2024.
Economists polled by Reuters and Bloomberg were more conservative in their forecasts, expecting the ECB to cut interest rates for the first time in June and to reach a total of 100 bp.
Convergence in the ECB for June
Some important officials of the ECB, such as the chief economist, Philip Lein and the president of the Bundesbank, Joachim Nagel, have expressed themselves in favor of the view that the first reduction in interest rates can take place in the summer, and there seems to be a general convergence of opinions in this direction. That is why, following all, the President of the ECB referred to this possibility.
However, given that the time until the summer is long, it seems unlikely that there will be any formal announcement from the ECB next Thursday.
On the contrary, the central bank will probably want to keep all possibilities open, insisting that its decisions will be made based on the available data and mainly the path of Eurozone inflation towards the medium-term target of 2%.
Since the last meeting, inflation rose in December to 2.9% from 2.4% in November, a development that was expected due to the discontinuation of support measures for energy prices by some countries and base results. Therefore, the increase in inflation in December is not a particularly worrying factor.
However, Lagarde has said the ECB will also wait for wage increases in this year’s collective bargaining agreements to see if they are compatible with returning inflation to its target.
On the other hand, the Eurozone economy was likely to have slipped into recession in the second half of 2023 – GDP fell by 0.1% in the third quarter and is likely to contract once more in the fourth quarter based on current surveys – which would facilitate a decision to cut interest rates.
The impact of the Red Sea crisis
Also on the ECB’s radar will be the impact on inflation and the economy from the disruption of maritime trade due to attacks by Yemen’s Houthi rebels on ships in the Red Sea.
Due to the decision of many shipping companies to transport goods from Asia to Europe by taking the much longer route via South Africa, freight rates have skyrocketed and the delivery time of goods has increased by around 10 days, leading to fears of new price increases.
According to a study by Oxford Economics, global inflation might rise by 0.7 percentage points at the end of 2024 if shipping companies avoid the Red Sea for several months and freight rates remain at twice their pre-crisis levels. area. This impact does not seem large, but it may slow down the decline in inflation, affecting the ECB’s decisions on interest rates.
Source: Daily
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