The European Central Bank (ECB) is anticipated to maintain current interest rates in its meeting today, however, its recognition of the declining inflation trend may pave the way for future cuts in interest rates later in the year. The timing of these cuts remains the major point of uncertainty.
Market participants predict that in the latter half of 2024, the ECB in Frankfurt will roll out a series of interest rate reductions, gradually and carefully lowering them in quarter point increments until there is concrete evidence of inflation gradually moving back towards the bank’s target of 2%.
ECB President, Christine Lagarde, stated optimistically in recent times that Q4 salary figures were an encouraging sign. However, she tempered her statement with the cautionary advice that regulators must be confident that the observed trend of decreasing inflation is sustainable and will guide them towards a steady 2% target in the medium term.
The services sector inflation, hinged on salary growth, has been flagged as a reason for caution. Initially slow to respond to inflation, the ECB attributed it to the aftermath of the Covid crisis, only recognising its seriousness after Russia’s Ukraine invasion which resulted in skyrocketing energy costs. Consequently, the Bank’s strategy for exiting this situation is expected to be gradual. This pace is unlikely to provide relief for the approximately 70,000 Irish households predicted to leave fixed-rate mortgage contracts in the current year. Market expectations are for three quarter-point rate cuts by the ECB this year.
Commentators will closely scrutinise Lagarde’s subsequent remarks post today’s rate announcement for hints on when the inaugural rate cut might be delivered, pinpointing June as the most probable date. Nonetheless, alluding to any specific timetable, she is likely to maintain will be dependent on hard data, a frequently used phrase among policy makers.
Illustrating this point, Fabio Panetta, governor of the Bank of Italy, succinctly stated last month that the benefits and drawbacks of cutting interest rates immediately and gradually, as opposed to a delayed but more aggressive strategy, which could potentially exacerbate volatility in financial markets and economic activity, need consideration.
Even when eventually reduced, it is expected that the rates will continue to be restrictive for a prolonged duration.
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