Not yet, but soon. This was the title of a recent Bank of America report on monetary policy. And everything seems to indicate that it will be like that. The European Central Bank (ECB) decided today, Thursday, to maintain interest rates at their current range of 4-4.75%. Something that was discounted. Between July 2002 and September 2023, the ECB raised interest rates 10 times, placing them at an all-time high, and has kept them unchanged ever since in view of the slowdown in inflation.
But the statement recognizes that there are reasons to lower. “Since the last meeting of the Governing Council in January, inflation has continued to decline. In the latest projections by ECB experts, inflation has been revised downwards, in particular for 2024, mainly due to a lower contribution from ECB experts now predict that inflation will average 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026. Inflation projections excluding energy and food have also been revised downwards and stand, on average, at 2.6% in 2024, 2.1% in 2025 and 2.0% in 2026.”
However, there are also reasons to stay still and not touch types. “Although most measures of core inflation have continued to decline, domestic inflationary pressures remain intense, due in part to strong wage growth.”
Therefore, everything indicates that we will have to wait. “Taking into account that inflation stood at 2.8% in January and has therefore only decreased by 10 basis points in the last month, we believe that current interest rates can be maintained for longer than expected at the beginning 2024. This could cause entities, which have improved their interest rates, to freeze this decline,” said the CEO of the online mortgage platform Ricard Garriga, after learning of the ECB’s decision.
Now all eyes are on the month of June, which is the month where most analysts predict that there may be some relaxation in the price of money. “The ECB is currently in a holding pattern, awaiting more information on inflation before beginning its soft landing,” said Jason Davis, global rates portfolio manager at JPMorgan Asset Management.
To understand next steps, it may be helpful to look at history. “Since the ECB set interest rates for the eurozone, it has lowered them 21 times, and never when core inflation was above 2.2%. Today, core inflation stands at 3.1% and will not fall below 2.2% before the summer. Unless an accident occurs that affects growth or financial stability, an ECB rate cut in June is, therefore, the most likely scenario,” comments Sylvain Broyer, Economist, after the bank’s decision was released. head for Europe of S
There are many unknowns if there can be any debate or discussion within the Council about the next steps to follow. Just two weeks ago Stournaras, the president of the Central Bank of Greece, publicly acknowledged that there will not be enough information to make a decision on the interest rate until June.
“A problem for Christine Lagarde this week is that the debate on lowering rates has already begun in a very public way, with quite a few members of the Governing Council taking the floor to express their opinions,” says Gilles Moëc, chief economist at AXA Investment. Managers, which is why he considers it difficult for Lagarde to completely avoid engaging in a “conversation about the conversation”, necessary before the first rate drop.
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