The notable decline in inflation in the euro zone since the peak reached in the fall of 2022, posting 2.6% in May, ended up convincing the ECB Governing Council to ease monetary restraint from June, at the end of an unprecedented rate increase cycle launched in July 2022, then nine months of pause at record levels.
However, the ECB still sees inflation “remaining above the target” of 2% “for a large part of next year”.
The cause is internal price pressures which remain strong, especially in services, due to high wage growth.
The institute therefore revised its inflation forecasts upwards compared to that of March, seeing the aggregate on average at 2.5% in 2024 and 2.2% in 2025, finally 1.9% in 2026.
Regarding the evolution of prices excluding energy and food products, the average increase will be 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026.
A boost for real estate
The last ECB rate cut was almost five years ago, in September 2019.
The question is whether the timid movement made on Thursday will create a psychological shock that is a precursor to a resumption of activity, all without seeing inflation start to rise again.
The most visible impact should concern the real estate market, where borrowers, especially those with variable rates, have been squeezed by the sudden rise in rates.
This caused a collapse in the volume of new loans to households seeking to purchase housing, without having a significant effect on housing prices.
Prospects for lower rates can therefore “alleviate the slump in the real estate market, the recovery of which can support growth somewhat,” notes Eric Dor, director of economic studies at the IESEG School of Management.
The past rise in rates, however, had little effect on the volume of new consumer loans, and households will once again loosen their purses based primarily on “purchasing power, i.e. the ability of wages to catch up past inflation, rather than interest rates,” adds Mr. Dor.
As for bank loans to businesses, at their lowest during the phase of monetary tightening, the rebound should mainly come from better economic prospects and competitiveness, which has deteriorated in the euro zone due to high energy prices.
For credit rates to fall sharply for the benefit of households and businesses, the ECB would need to “make it clear that it is committing to a series of successive rate cuts,” concludes Mr. Dor.
Before the Fed, after the SNB
However, in an economic context still full of uncertainties, the ECB gave no indication on Thursday on the continuation of the new cycle of rate cuts, continuing to affirm that this will depend on the economic data available meeting after meeting.
The Frankfurt institution, however, on Thursday showed courtesy for the first time in its history to its big sister in America, the Federal Reserve (Fed). The latter will have to wait to relax its policy because the dynamic economy of the United States is accompanied by a more stubborn price curve. The Swiss National Bank (SNB) had already lowered its key rate by a quarter of a percentage point to 1.5% in March.
The ECB, if it lowers its rates more quickly, could cause the euro to fall, favoring exports. But this would also make imports more expensive, leading to further fuel inflation.
