Three days before the European elections, the eurozone economy will receive a small boost. The European Central Bank (ECB) decided this Thursday to cut interest rates by a quarter point, leaving the main rate at 4.25%. In line with expectations. The markets (and the Euribor) had been discounting this downward gesture for weeks. It is the first time since 2016, when Mario Draghi took the price of money into negative territory, that the ECB has relaxed monetary policy.
And it does so with some indicators that would not exactly invite doing so: unemployment rate at historic lows (close to 6%), markets near record levels, wage growth in the first quarter of 4.7% and an inflation rate that In some countries such as Spain (3.4%) it is higher than the eurozone average (2.4%). In fact, it expects higher inflation than announced both this year and next.
The marginal credit facility (to 4.50%) and the deposit facility (3.75%) are also cut by a quarter of a point. In its statement, the entity recognizes that there are still risks. “Despite progress made in recent quarters, domestic inflationary pressures remain strong due to high wage growth, and inflation is likely to remain above target well into next year. The latest Eurosystem staff projections for both headline and core inflation have been revised upwards for 2024 and 2025 compared to the March projections. “Experts now consider that general inflation will be, on average, 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026.”
But Lagarde has not been able to avoid carrying out what some analysts have dubbed “the chronicle of an announced decline.” So announced that any change in position would have run the risk of being misinterpreted.
The inflation battle will set the pace
On the issue of salaries, the reasoning that economists make in the glass tower in Frankfurt is that although the increases remain substantial, second-round effects can be ruled out or inflation expectations raised upwards. The argument is that the new agreements that are being signed already incorporate lower increases than those of previous months. While the most pronounced increases are those that serve to compensate, months late, for the loss of purchasing power suffered due to the peak price growth recorded at the peak moment, between 2022 and 2023. This is due because updates to agreements in countries like Germany take place every three years. So, although salaries are on the rise, it is expected that they will gradually go down.
“There remains a risk that the ECB is cutting rates too soon, and it will be intriguing to see if the US Federal Reserve and the Bank of England follow suit in the coming months. The outlook for energy prices is unreliable and geopolitical conflicts in Europe and the Middle East could create significant challenges in the future. What’s more, the eurozone labor market remains surprisingly strong. Therefore, a revival of inflationary pressures remains a significant risk factor if the bank cuts rates too quickly,” Ben Nichols, Interim Managing Director at RAW Capital Partners, said in a note.
In the statement, the entity chaired by Christine Lagarde states that “the Governing Council is determined to ensure that inflation soon returns to its 2% medium-term objective, and will maintain official interest rates at sufficiently restrictive levels for as long as it takes to achieve that goal.” Therefore, it does not seem that the other cut will come before the summer, but rather towards September.
Luis Federico Florio
