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The interest rate turnaround in the euro area will probably have to wait until June

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The interest rate turnaround in the euro area will probably have to wait until June

The European Central Bank (ECB) is not touching the key interest rate for the fourth time in a row. The key rates remain at 4.5 percent and 4.0 percent for bank money parked at the ECB.

President Christine Lagarde said the ECB had made good progress towards its two percent inflation target. This makes the ECB Council more confident, “but we are not yet confident enough.” Lagarde reiterated expectations that a comprehensive overview of the development of inflation would not be available until the middle of the year. We will see something more clearly in April, “but we will know a lot more in June,” said Lagarde at the press conference after the interest rate policy meeting on Thursday.

Inflation will fall to 2.0 percent in 2025

Economists expect inflation in the euro zone to average 2.3 percent in 2024. In December they had assumed 2.7 percent. 2.0 percent is forecast for 2025, 1.9 percent for 2026. Projections for inflation excluding energy and food have also been revised downwards, to an average of 2.6 percent for 2024, 2.1 percent for 2025 and 2.0 percent for 2026.

By September 2023, the ECB had quickly and significantly raised its key interest rates to the current level due to the sharp rise in inflation, but has kept them quiet since then. The deposit rate, which is important for monetary policy, is currently 4.0 percent. The main refinancing rate, which has been less important for a long time, is 0.5 percentage points higher.

There has been speculation on the financial markets for some time about interest rate cuts because the once very high inflation is falling towards the ECB’s target of two percent. Around the turn of the year, up to six reductions totaling 1.5 percentage points were still considered possible. However, expectations have fallen significantly and currently suggest around three to four reductions for 2024.

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On the money market it is currently considered very likely that an interest rate cut will come in June. For the July meeting, a reduction is almost completely included in the prices. Experts usually see it similarly: The experts at Moody’s Analytics can imagine a first interest rate hike in April or June. The asset manager Vanguard sees the easing of restrictions beginning in June. The economists at DZ Bank also do not expect a turnaround in interest rates in the euro area until the course of the year.

In recent weeks, leading central bankers have warned against prematurely declaring victory over inflation. “Even if the temptation may be great: it is too early to cut interest rates,” said Bundesbank President Joachim Nagel when the Bundesbank presented its balance sheet on February 23rd. Inflation is on the decline, but the goal has not yet been reached.

US Federal Reserve Chairman Jerome Powell announced on Thursday that he would move away from high interest rates later this year. If the economy continues to develop well and inflation in particular continues to fall, the Fed can and will cautiously begin to scale back its tight monetary policy line over the course of the year.

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