In July 2022, the ECB ended the years of zero and negative interest rates in order to get high inflation under control. The central bank raised interest rates ten times in a row. Higher interest rates make loans more expensive, which can slow down demand and counteract high inflation rates. However, more expensive loans are also a burden for the economy because loan-financed investments become more expensive.
Room for interest rate cuts
The fact that inflation has been trending downward recently gives the monetary authorities leeway to loosen monetary policy again. The weakening economy in the euro area and in Europe’s largest economy, Germany, could benefit from interest rate cuts.
The ECB’s primary goal is to ensure a stable euro. The monetary authorities see this achieved if prices do not rise too much: In the medium term, the central bank aims for price stability with an inflation rate of two percent. Higher inflation rates reduce the purchasing power of consumers because they can then afford less for one euro.
Price increases in the euro area accelerated again in December: according to preliminary Eurostat calculations, consumer prices were 2.9 percent higher than in the same month last year. In November 2023, the inflation rate in the currency area was 2.4 percent, the lowest level since summer 2021.
Lower interest rates expected in summer
Meanwhile, core inflation, which excludes volatile prices for energy and food, fell in December: it fell from 3.6 percent to 3.4 percent. According to many economists, core inflation reflects basic inflation and represents the inflation trend better than the overall rate.
At the World Economic Forum in Davos in mid-January, ECB President Christine Lagarde said that an interest rate cut this summer was quite likely. At the same time, the Frenchwoman dampened expectations with reference to the cyclical dependence of monetary policy.
According to the ECB Council’s decision on Thursday, the deposit interest rate that banks receive for parked funds remains at 4.0 percent. This is the highest level since the monetary union was founded in 1999./ben/DP/jha
AXC0200 2024-01-25/14:23