Image: ANDRE PAIN (AFP)
“The institutes assume that the key interest rates will remain unchanged until the summer of 2024 due to only slowly falling core inflation rates,” said the economists’ autumn report for the German federal government on Thursday.
Since general inflation will probably move noticeably and sustainably towards the ECB target of two percent from autumn 2024, “the key interest rates will probably be reduced again”. The main refinancing rate, currently 4.5 percent, is expected to be three percent at the end of 2025.
Monetary policy should no longer become tighter
The ECB has raised interest rates ten times in a row since the summer of 2022 in the fight against inflation – most recently in mid-September. The relevant deposit rate on the financial market, which financial institutions receive from the central bank for parking excess funds, rose from 3.75 to 4.00 percent. This is the highest level since the start of the monetary union in 1999. With the interest rate hike, the ECB wants, among other things, to slow down the flow of credit and thus also the economy, so that price inflation in the euro area decreases. After the recent interest rate hike, the financial markets are also speculating that the end of the road could have been reached. In the medium term, the central bank is aiming for inflation of two percent. But it is still a long way from that at the moment: in August, annual inflation in the euro area was 5.2 percent.
The institute’s experts expect that the ECB’s monetary policy will no longer become tighter overall until 2025. “The measures that have already been taken will only have their full impact on the real economy in the coming quarters and will have a dampening effect on the economy.” According to the autumn report, the euro zone economy is expected to grow by 0.5 percent in 2023, by 1.1 percent next year and by a further 1.6 percent in 2025. Inflation in the currency area is expected to fall from 5.6 percent on average in 2023 to 2.6 percent next year. Annual inflation will therefore almost reach the ECB’s target of 2.1 percent in 2025.
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