European banks emerge well capitalized from the recent crises, but “several challenges remain” and supervision “will continue to keep an eye on lenders’ exposure to vulnerable sectors, such as commercial property”. This was stated by the President of the ECB, Christine Lagarde, in the introduction to the 2023 Annual Report on Supervisory Activities.
The ECB’s banking supervision for the period 2024-26 will give priority in its requests to banks to “strengthen robustness in the face of immediate macro-financial and geopolitical shocks”. The second priority is to accelerate efforts in governance and management of climate and environmental risks, the third is to “make further progress in digital transformation by building robust operational mechanisms”. We can read this in the 2023 Supervisory Activities Report of the Frankfurt institute.
The ECB expects euro area growth to begin a cyclical recovery in 2024. “In the absence of further shocks”, it will initially be driven by the increase in income “which supports private consumption, in the presence of falling inflation and of robust wage growth. In the medium term, the recovery will also be supported by investments”, thanks to the easing of the tightening of rates. The data “continue to point to modest growth” in the short term, but longer-term indicators show “signs of recovery”, the March bulletin said.
Switzerland’s surprise rate cut: the Central Bank lowered it from the previous 1.75% to 1.5%, while analysts expected it to keep it unchanged. After the decision, on the currency markets the Swiss franc fell by 0.7% against the euro to 1.024.
The Fed leaves rates unchanged but confirms three cuts in 2024 for a total of 75 basis points. And Wall Street breathes a sigh of relief: after a cautious start to the session, American stock markets advance decisively, wiping away fears of a lower-than-expected reduction in the cost of money this year. The ECB, however, is looking to June as the date of the first possible drop in rates.
For further information Agenzia ANSA Lagarde: ‘Cut in June if forecasts are confirmed’ – News – Ansa.it ‘In the following months the path of rates is not obvious’ (ANSA)
“The economy has made progress but inflation is still too high,” Fed Chair Jerome Powell said at the end of the two-day meeting. And the progress is substantial as emerges from the Fed’s new growth estimates: GDP is expected to grow by 2.1% this year, decidedly above the 1.4% forecast a few months ago, in the face of inflation at 2.4% and an unemployment rate at 4%. “The labor market is in good shape, it sees no cracks. Long-term inflation expectations remain well anchored,” added Powell, reiterating the Fed’s commitment to reaching the 2% inflation target. A target which, for now, is being pursued by keeping interest rates unchanged, for the fifth consecutive meeting, in a range between 5.25% and 5.50%, at the highest levels in 23 years.
“We will continue to decide meeting by meeting” how to proceed, the Fed president further explained, going as far as to say that it will be “appropriate at some point this year to start cutting” rates. According to analysts’ expectations, there is a 50% chance of a first reduction in the cost of money in June, but much will depend on the next economic data. Several analysts and economists instead point to July as the date for the first easing of monetary policy. “We need greater confidence in the trajectory of the decline in inflation towards the 2% target and the data for January and February have not helped”, observed Powell, specifying that it still remains to be seen whether the rise in recent months is an isolated phenomenon or less. The Fed president has never denied that the road would be full of obstacles.
In deciding when to cut, the Fed will move with caution to avoid political criticism: cutting rates too close to the presidential elections could in fact expose it to criticism and therefore damage its reputation and credibility.
“If we reduce the cost of money too soon, the risk is that inflation will rear its head. If we cut too late, the risk is that we will damage” the economy: “there are risks on both sides”, he warned Powell. Looking ahead, the Fed has revised downwards the number of possible interest rate cuts for 2025 when rates should fall from 4.6% at the end of 2024 to 3.9%, a higher level than the 3.6% previously expected. In the longer term, Powell did not say too much: “we don’t know if rates will remain high in the long term. My instinct tells me that they won’t return to very low levels”.
The ECB, however, could reduce the cost of money in June. “Even if inflation has slowed, there remains uncertainty about its persistence”: in June, if the data confirm the expected underlying inflation, the ECB “will be able to make the less restrictive monetary policy”, but from then on “there will be a period in which we will have to continually confirm that the data support the inflation outlook”, explained Eurotower president Christine Lagarde. Meanwhile, good news has arrived from Euroland that could facilitate the ECB’s task. In March, the European Commission’s flash estimate of consumer confidence improved by 0.6 percentage points in both the EU and the euro area.
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