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Tuesday, April 16, 2024

Happy June and… if for a reduction in interest rates

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Καλo Ιοyνη και … αν για μελωση επιτοκλων

By Alexia Kafetzis

Probably interest rate cuts from June, the ECB meets on Thursday

Next Thursday, the Governing Council of the European Central Bank (ECB) meets on monetary policy and the controversial question will be whether this time the prospect of lowering its interest rates will be officially discussed.

In September, interest rates rose for the last time in the upward cycle that began in July 2022, with the deposit rate reaching 4%. In the next three meetings, the ECB consistently reiterated that interest rates would remain steady for a significant period of time to contribute to a steady decline in inflation, calling any talk of easing monetary policy premature.

The head of the central bank, Christine Lagarde, as well as other officials, emphasized at the same time that they must be sure that inflation will move towards the target and there will be no risk of its resurgence, before proceeding with a change in policy. And they basically linked this certainty to the data on the results of the collective wage agreements in the first quarter of 2024, from which they will be able to get a good picture of whether the further de-escalation of prices will be sustainable.

The discussion, however, about when the interest rate reduction cycle will begin has started a long time ago, with statements by the members of the Board of Directors. of the ECB in the media. It follows from them that the prevailing opinion remains that the first reduction will take place at the June meeting, when the data will be known about the salary increases that will affect approximately 40% of the employees in the Eurozone, provided of course that the de-escalation of prices continues.< /p>

The assessment is that wage increases will be relatively moderate and will not undermine the path of a rapid return of inflation to 2%, but this remains to be confirmed so that there is relative certainty about this scenario. A first sign that things will move in this direction is the slowdown in wage increases in the fourth quarter of 2023 to 4.5% on an annual basis from 4.7% in the previous quarter, according to data collected by the ECB.

According to the dialogue, the assessment that the first reduction will take place in June was also expressed by the governor of the Bank of Greece, Yannis Stournaras, in a recent interview with Bloomberg. “Recent data shows that inflation will reach 2% this autumn. The recent slowdown in wages gives hope that we are on the right track, but we will not have enough information to decide on interest rate cuts before the end of the second quarter, so in June,” he said.

Mr Stournaras left a small window for the first rate cut in April, linking this possibility to a positive data surprise, apparently referring to February and March inflation. “A rate cut in April will be an option, only if the data is a surprise,” he said.

For February, data released by Eurostat on Friday showed a further decline in Eurozone annual inflation to 2.6% from 2.8% in January, a development that is certainly positive. This, however, is difficult to change the basic scenario of the ECB. So it remains to be seen whether there will be a big cut in March, which could under certain conditions lead to a faster rate cut.

The ECB experts will next Thursday present their new quarterly forecasts for inflation, which are expected to be better than those of last December and based on them, a formal discussion of interest rates could be held next Thursday

Finally, it should be noted that investors have bounced back from the much more optimistic forecasts that they made until a short time ago for the reduction of interest rates and have been aligned with the ECB. Their assessment now is that the first reduction will take place in June and cumulatively for the whole of 2024 they believe that this will not exceed one percentage point.

Source: 24h.com.cy

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