With inflation down, people are talking rate cuts. The European Central Bank may say not so fast

By Isaac M December 14, 2023

The inflation plaguing European shoppers has fallen faster than expected. The economy is in the dumps. That has people talking about interest rate cuts by the European Central Bank, perhaps as soon as the first few months of next year.

No rate move is expected at the bank’s policy meeting Thursday, and analysts say ECB President Christine Lagarde is highly unlikely to confirm any plans to cut. She may even warn that it’s too early to declare victory over inflation despite how it’s improved.

Like the ECB, the U.S. Federal Reserve and other central banks are running into market expectations that they will trim rates to support flagging economic growth now that price spikes have eased. But central bankers just finished drastic rate rises and want to ensure inflation is firmly contained.

Inflation in the 20 countries that use the euro currency surprisingly fell to 2.4% in November. That is not too far from the ECB’s goal of 2% considered best for the economy and a far cry from the peak of 10.6% in October 2022.

But wages are still catching up with inflation, leaving consumers feeling less than euphoric even as European city centers deck themselves in Christmas lights.

In Paris, travel agent Amel Zemani says Christmas shopping will have to wait for the post-holiday sales.

“I can’t go shopping this year, I can’t afford Christmas gifts for the kids,” she said. “What do they want? They want sneakers. I’m waiting for the sales to give them the gifts then. And they understand.”

Steven Ekerovich, an American photographer living in the French capital, said that while “Paris was lagging easily 50% behind the rest of the major cosmopolitan cities in pricing, it’s catching up fast. Rents, food, clothing. So, you have got to be careful now.”

Europe’s falling inflation and economic stagnation — output declined 0.1% in the July-to-September quarter — mean the ECB may be the first major central bank to pivot to rate cuts, said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

But the expectations vary, from Deutsche Bank’s prediction that March is a possibility to Pictet’s view that June is most likely. Lagarde has emphasized that decisions will be made based on the latest information about how the economy is doing.

“It remains to be seen how strong Lagarde will be able to push back against market pricing. She is more likely to stress the ECB’s data dependence, refraining from committing to any specific sequencing,” Ducrozet said in a research note.

Expectations of a March rate cut may be “excessive euphoria,” said Holger Schmieding, chief economist at Berenberg bank, cautioning that inflation could rise again before falling further. He doesn’t see a rate cut before September.

Central banks, including the Fed that met Wednesday and the Bank of England also meeting Thursday, drastically raised rates to stamp out inflation that occurred as the economy rebounded from the COVID-19 pandemic, straining supply chains, and as Russia’s invasion of Ukraine drove food and energy prices higher.

Higher interest rates combat inflation by increasing the cost of borrowing throughout the economy, from bank loans and lines of credit for businesses to mortgages and credit cards. That makes it more expensive to borrow to buy things or invest, lowering demand for goods and easing prices.

Facing an energy crisis that fueled record inflation, the ECB raised its benchmark rate from below zero to an all-time high of 4% between July 2022 and this July.

But higher rates also have held back economic growth. For example, apartment construction projects are being canceled across Germany, the biggest European economy, because they no longer make business sense amid higher interest costs.


AP video journalist Alex Turnbull contributed from Paris.


Leave a Reply

Leave a Reply

Your email address will not be published. Required fields are marked *