(CTN News) – On Thursday, the European Central Bank (ECB) decreased borrowing prices from their all-time highs, suggesting that it was making progress in its efforts to combat excessive inflation, despite the expectation that the rate of increase would continue well into the following year.
In recent months, the inflation rates of the 20 nations that comprise the euro have decreased from over 10% in late 2022 to slightly above the ECB’s 2% target. This decrease is primarily due to the return to normalcy in supply and the availability of inexpensive fuel, which has alleviated some of the post-pandemic fluctuations.
Nevertheless, the momentum has recently stalled, and warnings that inflation in the euro zone may remain sticky, as it has in the US, have made what appeared to be the beginning of a significant ECB easing cycle only a few weeks ago increasingly uncertain.
The European Central Bank (ECB) cut its deposit rate for the first time since 2019.
Nevertheless, it also raised its inflation forecasts for the current year and the subsequent year, underscored the necessity of maintaining borrowing rates at a sufficient level to regulate prices, and emphasized that any further rate reduction would be contingent upon the availability of new data.
Despite recent progress, the European Central Bank reports that wage growth has caused strong domestic price pressures. “It’s likely that inflation will stay above target for the rest of next year.”
Money market investors decreased their wagers on rate reductions subsequent to the announcement and have only factored in one for the remainder of the year, with a negligible probability of a second.
ECB President Christine Lagarde is anticipated to be questioned regarding the cadence of additional easing and whether a rate decrease in July is still feasible during a press conference that commences at 1245 GMT.
The European Central Bank (ECB) joined the central banks of Switzerland, Canada, and Sweden in reversing some of the harshest rate-hike streaks in recent memory with its action on Thursday.
It is generally believed that the U.S. Federal Reserve will participate after the summer, as it was halted by some stronger inflation readings earlier this year.
Final mile
Nevertheless, Isabel Schnabel, a prominent board member, has frequently expressed concern about a more difficult “last mile” to the ECB’s objective, as a result of certain stronger-than-expected data about salaries, inflation, and economic activity in the euro zone over the past few weeks.
The increase in service inflation has been a particular source of concern, as it is considered particularly significant by some policymakers due to its reflection of domestic demand. This inflation rate rose from 3.7% in April to 4.1% in May.
Analysts predict the ECB will keep lowering its policy rate.
This will reduce it to 2.50% at the conclusion of 2025. Nevertheless, they only expect two more reductions this year, in December and September.
Fabio Balboni, an economist at HSBC, stated in a note, “We remain convinced that additional reductions in September and December are imperative.” In spite of this, if the recent resilience of services inflation persists, it is increasingly likely that the ECB will have to be more cautious on the way down.
Furthermore, the ECB’s urgency was diminished by rebounding economic growth, which disproved the claim that high interest rates are suffocating the economy.
But the real elephant in the room may be the Federal Reserve and its inception or extension of its own easing program.
As a result of a tighter Federal Reserve, the euro would likely decline and import inflation would increase for the currency bloc. However, it would also raise bond market yields globally, resulting in a double-edged weapon with an unpredictable impact on the overall economy.
According to Mohit Kumar, an analyst at Jefferies, the Federal Reserve and the United States will determine the rate of rate reduction. If the Fed does not cut rates at all this year, we could see only two reductions from the ECB.
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