European Central Bank (ECB) officials remain committed to their plans of implementing multiple interest rate cuts throughout the year, despite the U.S. Federal Reserve’s delay in transitioning to a looser policy due to higher inflation and ongoing tensions in the Middle East leading to elevated oil prices.
Investors are reconsidering their expectations of a global easing cycle, as the Fed’s decision to slow down its plan to reduce borrowing costs, which was perceived as a signal for other central banks, was influenced by the persistence of robust U.S. price growth.
Read more: ECB interest rates remain unchanged amid inflationary concerns
ECB President Christine Lagarde has strongly suggested that the central bank of the euro zone is likely to commence the reduction of its deposit rate from the current record-high of 4 percent in June. However, she has been cautious in keeping the options open for the future course of action.
Most of her colleagues from the 20 national central banks within the currency bloc have been more explicit in expressing their anticipation of further rate cuts. They believe that inflation in the euro zone will gradually decline and reach the ECB’s target of 2 percent by next year, thereby necessitating additional rate reductions.
ECB’s focus on incoming economic indicators
All officials have highlighted that the ECB’s decisions will be based on incoming data, particularly regarding wages, profits, and productivity. Madis Muller, chief of Estonia’s central bank, stated last week that if economic developments align with their expectations, it is reasonable to anticipate several more rate cuts by the end of the year. Even Klaas Knot, governor of the Dutch central bank known for his hawkish stance, has indicated that he is not opposed to three cuts in 2024.
Gediminas Simkus of Lithuania suggested that more than three rate adjustments were possible, while Germany’s Joachim Nagel referred to a “cautious gliding flight.” Banque de France Governor Francois Villeroy de Galhau argued that although recent developments in the Middle East and the United States called for increased caution, they did not fundamentally alter the economic outlook in the euro zone.
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