Despite the improvement in inflation data from the highs of less than a year ago, inflationary pressures remain latent and condition the ECB’s actions.
There are many voices that predict a substantial downward trend in inflation in the coming months from current levels. The ECB’s own inflation forecasts for this year, 2024 and 2025 are 5.4%, 3.0% and 2.2% respectively. If these forecasts come true, it will be difficult for the ECB to lower interest rates before 2024.
Regardless of the fluctuations in the levels of inflation in the short term, the underlying inflationary factors invite us to be very cautious with excessively flattering messages regarding the evolution of prices and, therefore, upcoming reductions in interest rates .
Some of these factors are: deglobalization caused by the increase in geopolitical tensions, which leads countries and companies to bring supply and production chains closer to friendly territories; protectionism, revealed by laws such as the IRA (Inflation Reduction Act) or the CHIP Act in the US or the NZIA (Net Zero Industry Act) in Europe, which seek to subsidize domestic production; Europe’s energy dependence, which introduces a permanent unknown on the area’s energy bill; the costs of implementing the energy transition in the EU, with requirements not applied in other geographical areas, new taxes such as the tax on plastic or CO?, or the introduction of tariffs on imported CO?, through the Adjustment Mechanism in Carbon Frontier.
The rate cuts will wait longer than desired.
