The economy is longing for lower interest rates. With inflation on the decline, that could happen soon.
The first interest rate cut in the euro area is getting closer. “I’ll put it this way: The likelihood is increasing that we could possibly see an interest rate cut before the summer break,” said Bundesbank President Joachim Nagel in a conversation on the “Table Today” podcast that was broadcast on Friday. Nagel emphasized: “That will clearly depend on the data. But the prospects have brightened in this regard.”
On Thursday, the Council of the European Central Bank (ECB), of which Nagel is a member, left key interest rates unchanged despite a faster decline in inflation. The most important interest rate for supplying the banking industry with fresh central bank money remains at 4.5 percent. The deposit interest that banks receive for funds parked with the ECB remains 4.0 percent.
Lagarde: We’ll know more from April
After the deliberations in Frankfurt, ECB President Christine Lagarde had hinted at a possible change of course for the monetary policy meeting on June 6th: “We clearly need more evidence and more data, we will know a little more in April, we will know a lot more in June .”
In July 2022, the ECB ended the years of zero and negative interest rates in order to get inflation, which had temporarily reached record levels, under control. The central bank raised interest rates ten times in a row. The fact that loans therefore cost more can slow down demand and counteract high inflation rates. However, more expensive financing is also a burden for companies and private investors. In view of the weakening economy, there have recently been increasing calls to lower interest rates again.
Inflation continues to decline
In addition, the inflation rate in both the euro area and Germany has recently been trending downwards. According to the latest forecasts, the ECB expects to achieve its goal of price stability with two percent inflation in 2025. Higher inflation rates reduce people’s purchasing power.
Nagel warns that one should “not fall into euphoria too early that the issue of inflation has been put to an end.” At the same time, the Bundesbank President’s confidence is also growing: “The picture has certainly become more solid that we may soon be able to see other interest rates again. But now it is still time not to lose composure here too early and in terms of interest rate policy Keep the path like this for now.”
Interview Nagel at table.media March 8, 2024 Federal Statistical Office on inflation in Germany ECB decision March 7, 2024 Opening statement Lagarde March 7, 2024 ECB definition of price stability Time series ECB key interest rates ECB purchase programs ECB explanations on inflation Economic forecasts from the EU Commission Eurostat on Inflation in the euro area
Source: Stern
