While the European economy has plunged into stagnation, the scenario of a cut in key rates, likely to revive growth in activity, is confirmed. A week after keeping rates unchanged, ECB President Christine Lagarde confirmed on American channel CNN this Tuesday that the next rate cut will be a cut.
“There may be several pauses but the next movement will be downwards,” she declared, adding that members of the Governing Council of the European Central Bank (ECB) were on the same line.
” If we have a choice between increases and decreases, it would be to decrease theme,” she added.
Falling inflation
As a reminder, after 10 consecutive hikes to slow inflation following the start of the Russian invasion of Ukraine in February 2022, the ECB made three consecutive pauses in its key interest rate variation, currently at a record level of 4%. , reached after the successor. A reasonable pause by a slowdown in inflation that is gradually moving towards the 2% objective, which is synonymous with price stability. From 10% last year, price increases have slowed significantly since then. It was only 2.9% in December. ” We are on a trend of disinflation, no doubt
“, estimated Christine Lagarde,” But to have faith we need to go through the process ”In an interview with La Tribune on Sunday, Villeroy de Galhou, governor of the Bank of France, predicted that inflation should return to 2% next year.
Investors are banking on a decline in April
That schedule is yet to be set. If Christine Lagarde recently mentioned the possibility of a rate cut “ Around June “, many analysts are counting on this” April “
Investors” The lack of strong opposition to suggestions of rate cuts starting in April was interpreted as a signal Tickmill analyst Patrick Munnelly explains. A point shared by Lee Hardman, MUFG analyst. An interpretation supported by the words of Peter Kazimir. This member of the ECB Governing Council for his part mentioned on Monday the first rate cut by April or June, although June is more likely, Bloomberg agency reported.
Stability of the economy
Pressure on the ECB is high as the European economy narrowly escaped recession at the end of the year and posted a meager growth of 0.5% for the whole of 2023, a far cry from the good health shown by the American economy. Among the reasons put forward by analysts, the high interest rates imposed by the ECB feature prominently. A contraction in credit is weighing on investment and consumption by businesses and households alike, while exports suffer from a slowdown in global demand.
Europe pales in comparison to the United States, whose GDP is projected to grow by 2.5% in 2023. Across the Atlantic, the question of rate cuts also looms. It will be at the center of the monetary meeting that ends this Wednesday, after the latest well-expected figures on inflation and US growth. After raising the inflation rate 11 times between March 2022 and July 2023, bringing it up by 5 points to a range of 5.25-5.50%, the Federal Reserve is considering lowering it ‘forthcoming’. Its officials indicated in December that they expected three or four reductions this year, but without specifying when they would begin. In early March, some venture. In May for most market players, according to CME Group assessment. Because PCE inflation figures, a measure favored by the Fed and which it wants to reduce to 2%, were published last week, bringing a touch of optimism. Core inflation – which excludes energy and food – is the lowest in nearly three years, at 2.9%. This means that the 2% target can be achieved soon.
Biden under pressure
Especially since the political pressure has begun to be felt: American President Joe Biden has made economic success one of the main axes of his campaign, while his main Republican rival, his predecessor Donald Trump, is precisely attacking him on this topic. In polls, most Americans are dissatisfied with the state of the economy and the way Joe Biden is managing it, despite good unemployment numbers, at their lowest level since the pandemic, and growth, far from the most expected. Financial crisis. The unemployment rate is still at a 50-year low, at 3.7% in December. But rising rates have increased the cost of borrowing, particularly real estate, while inflation has eroded the purchasing power of households, even as wages have generally risen.