Inflation in the euro area has been steadily decreasing for several months, resulting in optimism among the general population and raising the possibility of an initial interest rate cut by the European Central Bank (ECB). Despite these positive signs, the leadership at the central bank remains somewhat hesitant. The recent trends in falling inflation rates within the financial markets and central banks indicate a potential shift in interest rates.
The Swiss National Bank (SNB) took the lead by initiating an interest rate cut, reducing the key interest rate from 1.75 to 1.5 percent. However, major central banks like the US Federal Reserve (Fed) and the ECB have not followed suit yet. The ECB recently decided to leave its key interest rates unchanged, maintaining the key interest rate at 4.5 percent and the deposit rate at 4 percent.
Despite maintaining current interest rates in the short term, there is anticipation among bank economists that there will be a reduction in key interest rates by 0.25 percentage points at the next ECB meeting in June. This would be the first interest rate cut since September 2019. Inflation in the euro zone decreased from 2.6 to 2.4 percent, nearing the ECB’s target rate of 2 percent in the medium term.
The decline in inflation was slightly more substantial than expected, with energy prices notably decreasing. However, inflationary pressure on services and food, alcohol, and tobacco remained relatively strong. The ECB is closely monitoring these developments and is expected to make decisions based on incoming data.
The ECB’s decision on interest rate cuts may be influenced by factors such as wage negotiations within the euro zone and the potential risks of a wage-price spiral. The ECB is waiting for further data before deciding on a course of action. While expectations are high for a rate cut in June, there is a need to consider various economic factors before implementing any changes. The US’s recent increase in inflation rates has also impacted market expectations and decisions regarding potential interest rate cuts by the Federal Reserve.