Source: AFP
The European Central Bank is expected to freeze interest rates again this week, with officials wary of starting to cut before seeing more evidence that recent declines in inflation will be sustained.
After the ECB launched an unprecedented campaign of monetary tightening to tame low consumer prices, inflation in the euro zone has slowed steadily from a peak of more than 10% at the end of 2022.
It fell to 2.6% in February, according to preliminary data, from 2.8% in January, and not far off the ECB’s 2% target.
At the same time, the outlook is bleak, with the eurozone narrowly avoiding a technical recession in the second half of 2023, weighed down by poor performance in its biggest economy, Germany.
While slowing inflation and a worsening economy should bolster the case for rate cuts, inflation’s downward path has been uneven and officials remain concerned about completing the “last mile” to the central bank’s target.
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The ECB’s Frankfurt-based governing body is widely expected to keep the benchmark deposit rate steady at a record 4 percent for a fourth consecutive meeting on Thursday.
The ECB is “in no rush,” Ann-Katrin Petersen of the BlackRock Investment Institute told AFP.
“He still sees the battle over inflation as unfinished.”
However, HSBC said “the meeting will be closely watched by investors looking for any guidance on the timing of the first cut and the subsequent pace of easing.”
Investors will also be watching the ECB’s updated forecasts due to be released alongside the interest rate decision, with a slight downward revision expected for this year’s GDP growth as well as inflation.
Salary concerns
Inflation in the 20-nation eurozone soared in 2022 as Russia’s invasion of Ukraine sent food and energy costs soaring, compounded by supply chain problems linked to the pandemic.
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While shocks from the war in Ukraine have eased, concerns have shifted to service sector inflation and wage growth as workers push for big pay rises to combat higher prices.
Source: AFP
“With many wage negotiations pending, the ECB may want to see more evidence that wages are moving in the right direction,” HSBC said.
Heightened geopolitical tensions in the Middle East have also fueled concerns that inflation could pick up. Attacks by Yemeni rebels on Red Sea shipping have led shipping companies to avoid the vital trade route, while a spillover from the Israel-Hamas war could affect oil prices.
According to the minutes of the last board meeting in January, members stressed that “continuity, vigilance and patience are still needed, as the deflation process remained fragile and giving up too early could undo some of the progress made.”
However, there is no doubt that when the ECB moves again, it will be to reduce borrowing costs.
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“There may be a pause, and a wait, and a wait, but the next move will be downward,” ECB President Christine Lagarde said in late January.
Speculation had grown late last year that a cut could come as soon as March as inflation began to fall sharply.
But those expectations evaporated as price increases proved stubborn, with core inflation — which strips out volatile energy and food costs — particularly not easing as quickly as expected.
Economists are now betting on a first rate cut in June and a slow process thereafter.
“We expect the ECB to engage very gradually in a series of rate cuts,” said ING economist Carsten Brzeski.
“At least for this year, rate cuts of 25 (basis points) in meetings with fresh macroeconomic forecasts look like the most likely scenario for this cautious and gradual rate cut cycle.”
Source: AFP