Contradictory Signals from the Economy
While most economists anticipate quarterly rate reductions after this week’s initial announcement, some highlight factors such as persistent inflation, sustained wage growth, and unexpected strength in production in the eurozone, suggesting that monetary easing may be limited. Even traders are scaling back their bets on future reductions, dismissing the possibility of a decrease in July. According to some analyses, two rate cuts could suffice for the year 2024.
ECB Aligned with the Fed
Furthermore, it seems unlikely that the ECB will significantly diverge from the policy of the US Federal Reserve, which is expected to remain unchanged for some time.
Caution Regarding Economic Indicators
Recent economic reports also provide reasons for caution. A key wage indicator in the eurozone, which policymakers hoped would demonstrate inflation control, has not shown the expected signs of moderation. This trend could fuel price increases, especially in the services sector, potentially prolonging inflation persistence. Indeed, the inflation rate reached 2.6% last month, surpassing forecasts and exceeding April’s 2.4%. Despite these discouraging data, there are no signs of a reversal regarding the announced reduction for this week, bringing the deposit rate to its lowest level recorded nine months ago.
Revised Expectations
However, economists expect fewer movements this year. While nearly half of respondents to a Bloomberg survey before the ECB’s April meeting anticipated four or five rate cuts for 2024, this number has significantly decreased. Today, 70% of them predict only three reductions by the end of the year.
Conclusion
In summary, the uncertainties surrounding ECB interest rate reductions in 2024 reflect the complex challenges facing the European economy. As economic data continues to evolve, ECB policymakers will need to navigate cautiously to ensure appropriate and balanced monetary policy.
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