The ECB “does not intend to bind itself to a particular rate path“. They say it loud and clear from Frankfurt, reiterating that the Governing Council, to “ensure the timely return of inflation to the objective of 2 percent in the medium term, will keep the reference rates at sufficiently restrictive levels for as long as necessary”. This is what we read in the latest economic bulletin from the European Central Bank, which reiterates that, despite the last cut made in June, the level of rates remains linked to the trend of prices in the Eurozone.
The ECB’s slowdown on rate cuts
The ECB writes that even with the cost of living accelerating again in May to 2.6%, “most of the measures of underlying inflation fell again in April” confirming “the gradual reduction in price pressures“.
Since September 2023, inflation has fallen by more than 2.5 percentage points with a “significantly improved” outlook, but this it is not enough to ensure rates at lower levels.
According to the ECB, in fact, there are various factors that could cause prices to rise beyond forecasts, such as an increase in wages beyond expectations, the worsening of the global geopolitical situation and the worsening of the climate crisis.
The latest estimates for headline and underlying inflation have been revised upwards for 2024 and 2025 by Central Bank experts, compared to the March exercise: the members of the Governing Council place headline inflation, on average, at 2.5 percent in 2024, 2.2 percent in 2025 and 1.9 percent in 2026, while inflation net of the energy and food component is expected to average 2.8 percent in 2024, 2 .2 in 2025 and 2.0 in 2026.
The institute explains, in fact, that the increase in the cost of living “could rise higher levels than anticipated if wages or profits rose more than expected. Upside risks for inflation also come from increased geopolitical tensions, which could lead to a rise in energy and transport costs in the short term, causing disruptions in world trade. Furthermore, extreme weather phenomena, and more generally the unfolding of the climate crisis, could increase food prices.”
The priority objective remains to return as soon as possible to inflation of 2 percent in the medium term and for this reason it is ensured that “the Governing Council will continue to follow a data-driven approach, according to which decisions are defined from time to time at each meeting“, based on the “assessment of inflation prospects in light of new economic and financial data, the dynamics of underlying inflation and the intensity of monetary policy transmission”.
Economy recovering
However, the ECB’s June economic bulletin also underlines how the recovery of the Eurozone economy at the beginning of 2024 has “exceeded expected levels by ECB experts” and is destined “to continue in the short term, at a faster pace than previously expected”.
Growth is driven by foreign demand and consumption supported by the “”improvement in real disposable income in the presence of robust wage dynamics, the gradual increase in confidence and the improvement in the terms of trade” as well as by the “progressive reduction” of the past tightening of monetary policy.
