At the end of October, the European Central Bank (ECB) kept interest rates unchanged at 4%, after raising interest rates 10 times in a row starting in July 2022. As inflation cools, economist Osama Rizvi explains to Euronews Business the prospects for a rate cut and the outlook for a rate cut. Why is it important to Europeans?
The ECB’s next board meeting is scheduled for December 14, 2023, and many analysts expect the European Central Bank to leave interest rates unchanged, raise rates, or cut rates. Last time, the bank suspended interest rates at 4%.
“Remarks from ECB officials in recent weeks indicate that the period of peaceful agreement within the Governing Council is over. Some members have said they remain open to the possibility of further rate hikes, while others Members said it was too early to discuss interest rates.”Some acknowledged that a rate cut would certainly be considered in 2024. “We know that the diverse list of comments only means that the debate about what to do next is in full swing,” the analyst said. ING said.
How do interest rates affect you?
Rising interest rates have a negative impact on consumers because interest on mortgages and other loans becomes more expensive. Additionally, when costs go up for businesses (because interest rates are currently high), those costs are typically passed on to consumers. This essentially means you’ll end up paying more for everyday items.
This has fueled a cost of living crisis that is affecting most people across Europe in some way. On the other hand, when interest rates fall, the opposite phenomenon occurs and the economy as a whole expands.
The euro area’s central bank is the European Central Bank, which meets eight times a year (every six weeks) to decide interest rates. This is called the Board Monetary Policy Meeting.
Why are interest rates rising?
Raising interest rates has many functions, the most important of which is to fight inflation.
Post-pandemic, the world witnessed an unprecedented rise in inflation. There were many reasons behind this, but the main reason was an increase in the money supply. Additionally, as supply chains around the world are disrupted, disrupted and fragmented, these disruptions are causing commodity prices to rise, as seen in the Baltic Dry Goods Index, which tracks the cost of transporting bulk dry goods. It reached its highest level in 12 years. .
As a result, raw material costs have skyrocketed. European companies importing yarn from Bangladesh will now have to pay double the pre-pandemic level. Owners pass this increased cost on to consumers, subsequently causing inflation.
Central banks around the world, including the European Central Bank (ECB), have been fighting inflation by raising interest rates.
Will the ECB cut rates in 2024?
Now that we know the details of monetary policy and its relationship to inflation, it’s time to ask the key questions. Will the ECB cut rates next?
Eurozone inflation fell to 2.4% in November, the lowest level since July 2021. The ECB has a 2% inflation target and things appear to be moving in this direction.
The current mood suggests that the ECB will be the first central bank to cut interest rates, as indicated by Francois Villeroy de Galau’s comments at a recent meeting. He said there was no shock and we could expect the rate hike cycle to end, as disinflation is progressing “faster than expected.”
That has pushed Treasury yields to multi-month lows, with investors now betting on a rate cut with a 75% chance of a cut, up from 40% last week. Goldman Sachs also changed its forecast for the ECB’s rate cut from the third quarter of 2024 to the second quarter of 2024.
But some say it’s too early to open a bottle of champagne because the fight against inflation is far from over. Ines McPhee, chief economist at Oxford Economics, said the ECB was the most vulnerable to monetary policy mistakes (cutting interest rates too soon).
ECB President Christine Lagarde expressed concern that inflation would rise again as energy price subsidies are removed.
He also said early last month that the ECB would not start cutting rates until “the next few quarters.”
“Although soft indicators have recently stabilized at low levels, the weak macroeconomic background no longer justifies rate hikes, even for hawks.However, at next week’s Governing Council meeting, the ECB will ING also noted in its latest report ahead of the ECB Governing Council meeting that “inflation in the euro area is expected to decline,” not only considering slower and more rapid growth.
Moreover, as ING also highlighted, the ECB will need to take into account the still relatively strong labor market and wage growth.
“With core and headline inflation remaining above target, any discussion of an imminent rate cut would be premature,” ING added.