European Central Bank exercises caution on rates
ECB exercises caution in charting a path toward a lower key interest rate
In June European Central Bank (ECB) officials led by President Christine Lagarde lowered the key deposit rate by a quarter-point to 3.75 per cent, having held it at 4 per cent for the previous nine months
Since then, the ECB has stopped short of indicating more cuts may follow, although acknowledging that the inflation outlook has improved “markedly,” noting that they will “keep policy rates sufficiently restrictive for as long as necessary” after also raising projections for prices.
In an article which quotes London Business School’s Professor Richard Portes, the Wall Street Journal’s Paul Hannon, notes that during the central bank’s annual off-site Forum retreat in Sintra, Portugal - exploring the theme, “Monetary policy in an era of transformation” - the outlines of a road map on interest rates now appear to have been drawn.
Hannon reports that in some speeches during the event, and in conversations in the sidelines of the Forum, policymakers have indicated that they won’t lower the key rate to 3.5 per cent from 3.75 per cent when they next meet on July 18. “But they may cut again at their first gathering after the summer break, on Sept. 12.”
“That’s because the projections produced by the ECB’s economists are key to assuring policymakers that they are indeed on a path back to their 2 per cent inflation target by the end of 2025. Assuming that the expectation is valid, the key rate will obviously have to fall; otherwise, the ECB would be tightening monetary policy at a time when the eurozone economy is still in the early stages of a recovery from Russia’s invasion of Ukraine.”
The ECB seems a little too cautious, observes Hannon. To some long-time observers of the institution, those who see little threat of a sustained revival in inflation in an economy that is barely growing, this is certainly true.
“There is no reason whatsoever not to cut given the weakness of the economy,” said Professor Richard Portes. The founder of the Centre for Economic Policy Research added, “There is excessive caution. We’re getting back to normal.”
