Less than a week after the latest cut, the ECB says it is ready to lower its rates again. “If the data coming in continues to confirm our base scenario”SO “the direction is clear: we plan to lower interest rates further”said its president, Christine Lagarde, during a speech in Lithuania on Monday.
The scenario in question is that of a return of inflation to the 2% objective during 2025 in the euro zone. It is already not far from it (2.3% over one year in November). “The disinflation process is on track. According to Eurosystem services, overall inflation would average 2.4% in 2024, 2.1% in 2025, 1.9% in 2026.she said in a press release last Thursday.
The ECB lowers its rates again… still with caution
The boss of the ECB is not the only one to consider that other reductions are on the horizon. “There will be more rate cuts coming next year. Others, in the plural »insisted the governor of the Bank of France, François Villeroy de Galhau, on BFM Business last Friday. Without wanting to give more details however. “We are not committed in advance to a rate trajectory”he recalled.
A policy always « restrictive »
With this fourth reduction, the ECB has amplified the turning point made to relax bank financing conditions. And, in turn, reduce credit rates for individuals and businesses. By lowering its rates gradually, the monetary institution can stimulate growth while ensuring that this does not revive inflation.
As a reminder, the ECB launched a period of drastic monetary tightening from the summer of 2022. Objective: deal with high inflation linked to the war in Ukraine and the post-Covid recovery. Before launching the opposite strategy from June this year, with an initial drop in its rates of 0.25 percentage points. Then two identical ones in September and October. With this fourth, the reference rate now stands at 3%.
“Current monetary policy remains restrictive”however, recalled Christine Lagarde.
Adapting to the economy, not just inflation
The ECB can afford to take this path because of inflation close to its objective of 2% – compared to a peak of more than 10% observed in the fall of 2022. The concern now relates more to “weaker than expected growth prospects and increased uncertainty linked to geopolitical events”indicated the president. Thus, confident of a return « durable » inflation in the highlights of her mandate, she now wants to put in place a policy “appropriate” on rates, based on economic data and no longer just linked to inflation.
It is possible to “return to a situation where the (monetary) policy horizon can adjust according to the nature, scale and persistence of shocks, as needed”, underlined the first guardian of the euro.
ECB: Christine Lagarde very optimistic about the return of inflation to 2% in the euro zone
Consensus around the “neutral” rate
The markets also anticipate several rate cuts in 2025. They estimate that the ECB will reduce them to bring the reference rate to around 2%, a so-called “neutral” level which neither penalizes nor supports the economy. An opinion shared by the governor of the Bank of France. While the ECB had until now insisted that rates should remain “sufficiently restrictive for as long as necessary”she removed the term “restrictive”. This means that “we would rather go towards what is called the “neutral rate””estimated François Villeroy de Galhau. This rate would be in “a range between 1.7 and 2.5%”he clarified.
“We are still significantly above” of this level and “there is room” for other reductions, he supported.
Several forecasts anticipate cuts of 0.25 percentage points at the six ECB meetings in 2025 until September. This would increase the reference rate from the current 3% to even 1.5%. To be continued.
(With AFP)
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