Indeed, the EKT raised rates for the first time in July 2022, when inflation in the Eurozone had already reached 8.6%, more than four times above its own 2% target.
The president of the central bank, Christine Lagarde, said at the time that it was not possible to foresee the Russian invasion of Ukraine, which led to the explosive increase in the prices of energy and some foodstuffs.
However, inflation had reared its head before the war in Ukraine, largely due to problems in supply chains caused by the coronavirus pandemic, with supply unable to meet a surge in demand after economies opened up. In January 2022, inflation in the Eurozone was “running” at an annual rate of 5.1% and on an upward trajectory.
From July 2022, the ECB proceeded with 10 interest rate cuts until September 2023 to reduce inflation, which it succeeded to a significant extent, with the help of other factors, of course, and mainly the de-escalation of energy prices. In June, it began its monetary policy easing cycle, proceeding with its first rate cut of 25 basis points, with the deposit rate falling to 3.75% from 4%.
Meanwhile, the ECB experts’ forecasts were adjusted to the new data and their degree of credibility increased. Lagarde said last month that because of that credibility there was more confidence in ECB officials’ forecast that eurozone inflation would reach its 2% target in the second half of 2025. When asked again on Thursday, she appeared less categorical.
In any case, predictions are predictions and one cannot be complacent about them. To the extent that the ECB staff’s forecast for inflation, which is updated quarterly, is confirmed by the latest data, interest rate cuts will continue.
On Thursday, the ECB kept interest rates unchanged, but this was something that had been signaled from the previous session, with the rationale that sufficient time is needed for data to confirm the ECB’s forecasts.
In other words, discussion of another rate cut will take place at the September meeting, when there will be data on inflation for July and August, but also new data on its key determinants, such as wage increases, margins business profits and labor productivity.
Lagarde said that the September decision is very open and will depend on the progress of the above data. If these are consistent with the forecast for inflation to return to 2%, a further reduction should be expected. If not, then the ECB will not cut interest rates until the data confirms that inflation is moving towards the target.
Among the determinants of inflation, positive for its return to target is the decline in the business profit margin in the first quarter of 2024 after two years of significant growth. This development has the result that not all of the wage increase, which moves between 4% and 5% on average, is passed on to prices, but a part of it is absorbed by profits. Earnings, which were largely responsible for the spike in inflation in 2022, now appear to be helping to lower it.
Another factor that comes into the equation for reducing inflation is labor productivity. If it rose, it would also contain upward pressure on prices, but for now the improvement is very small. Hopes are expressed, however, that with the increase in demand it would be possible to improve significantly.
In Parliament the ratification of the contract for the port of Heraklion – What will be the obligations of the new investor
Eleni Foureira: “Enchanted” everyone at her sold out concert at the Katrakeio theater in Nice [βίντεο]
Evros: The border guard who was shot in Soufli is out of danger – The scenarios considered by EL.AS
#Investors #savers #focus #interest #rate #cut #September #Summer #inflation #data #critical
