Eurozone inflation has dropped from above 10% at its 2022 peak to a near three-year low of 2.4% in April. Forecasts see a rise to 2.5% when May’s data comes out later this week.
There are indications that the European Central Bank (ECB) may be planning to cut interest rates at its meeting next month.
In an interview with the Financial Times, the ECB’s chief economist Philip Lane said: “Barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction.”
If there is a cut at the 6 June meeting, which takes place as the European elections are being held, it would mean the ECB would be cutting its rates ahead of any other major central banks. It had came under criticism for being too slow to raise them after inflation surged three years ago.
Eurozone inflation has now fallen close to the ECB’s target figure of 2% and investors believe that leaves room for the central bank to cut its benchmark deposit rate by 0.25%. The rate is currently 4%.
While some central banks have already cut the cost of borrowing, the US Federal Reserve and the Bank of England have yet to make a move.
When asked if he was pleased the ECB could cut rates earlier than the other banks, Lane told the FT: “Central bankers aspire to be as boring and I would hope central bankers aspire to have as little ego as possible.”
He explained that, because Europe had been so badly affected by the war between Russia and Ukraine following Russia’s invasion of Ukraine, inflation had now fallen faster than elsewhere.
Energy prices hit Europeans badly
“Dealing with the war and the energy problem has been costly for Europe,” he told the FT. “But in terms of that first step [in starting to cut rates] that is a sign that monetary policy has been delivering in making sure that inflation comes down in a timely manner. In that sense, I think we have been successful.”
He went on to explain it was important to keep interest rates tight so that inflation did not start to rise again to go beyond the bank’s target. That, he said, would be “very problematic and probably quite painful to eliminate”.
Referring to where potential pressure on inflation might come, Lane said the “still significant amount of cost pressure” from rapid wage growth that was pushing up services prices meant the bank’s policy would need to be restrictive until 2025.
“Next year, with inflation visibly approaching the target, then making sure the interest rate comes down to a level consistent with that target − that will be a different debate,” he told the FT.
