According to recent reports and statements made by European Central Bank officials, there is growing consensus among policymakers that it may be appropriate to cut interest rates during their upcoming meeting in June. While a “very large majority” supported keeping deposit rates unchanged at 4% during their April gathering, some members believed that the current policy stance may have become too restrictive due to slowing inflation. These members suggested that inflation is approaching the desired level of 2% and could warrant three rate cuts in 2024. However, some more cautious members expressed concern about potential wage gains and volatile energy prices that could lead to persisting inflationary pressures. Overall, investors seem to align more closely with the view that three quarter-point rate reductions could occur by the end of the year.
Other notable insights from the ECB’s April meeting include acknowledgement of the limitations of model-based constructs used to determine the “natural rate” of interest, as well as the potential impacts of geopolitical tensions on inflation and global trade. Members also noted that economic growth risks remain tilted to the downside, and that spillovers from the US dollar’s depreciation following the release of US inflation data could potentially slow disinflationary processes in the euro area. Additionally, some members argued that exchange rate effects would depend on the underlying shocks driving economic activity and inflation.
The ECB’s recent accounts suggest that the forecasting ability of their quarterly projection exercises has improved, with latest information largely validating previous growth and inflation outlooks. Many members widely agreed that the economy’s recent performance broadly matched their expectations. However, some acknowledged that renewed risks to inflation could arise from possible escalations in geopolitical tensions.
As the ECB prepares for its upcoming meeting, it seems that opinions are divided regarding the speed at which interest rates should be lowered. While some members advocate for prudence due to lingering inflationary pressures, others believe that inflation is approaching the desired level and that three rate cuts in 2024 may be appropriate. As always, the ECB will strive to strike a balance between mitigating current risks and preserving price stability over the medium term.
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