Though EU inflation came down in January too, the European Central Bank is in no rush to cut rates.
Inflation in the Eurozone cooled to 2.8% in January, down from 2.9% in December and confirming market expectations. While price growth in Europe has generally eased, inflation remains far from the European Central Bank’s target.
The ECB, like most advanced central banks, set 2% as the ideal inflation target. According to a recent ECB survey, Europe will reach the target as late as 2027.
Nevertheless, EU inflation remains the lowest among Western economies. In the United States, prices cooled in January to 3.1%, higher than expected, while the UK is months behind with inflation at 4%.
The highest contributors to January inflation in the EU were services, followed by food, alcohol, and tobacco. Energy prices remain steadily below pre-Ukraine war levels and declined further in January.
Italy and Denmark reported the lowest inflation at 0.9%, with Romania recording the highest level at 7.3%.
Now, the ball is in the ECB’s court, which will have to decide on the future monetary policy. The next meeting will take place in two weeks, and speculation already circulates regarding its possible outcomes.
The question of rates
The European Central Bank brought interest rates to 4%, the highest level in the euro’s relatively brief history. At their January meeting, they kept rates steady, signaling no rush to bring them down.
The effects of high interest rates have impacted Europe quite severely. GDP in the Eurozone stagnated in 2023, while key economies like Germany and the Netherlands fell into a recession.
Germany in particular has been dubbed “the sick man of Europe” as it entered a seemingly unstoppable cycle of economic contraction.
Manufacturing and service production declined across the whole continent, with exports to foreign markets like China slowing down.
For this reason, paired with inflation quickly falling, markets and experts are urging the ECB to start cutting rates. However, President Christine Lagarde’s hawkish approach leaves little room for interpretation: the ECB will hardly consider early rate cuts.
According to ECB official Robert Holzmann, the ECB will cut rates after the Federal Reserve in the US. He believes this despite a virtually opposite scenario between the two blocks: GDP in the US is booming while inflation remains sticky.
“Typically the Fed always in the last few years has always gone first by about half a year so I would assume, ceteris paribus, as things are, that we would also follow with delay,” Holzmann said.
It appears therefore likely that rates will remain unchanged in March and April. Later in the summer, most likely June or July, the ECB might finally concede to a first dovish move.
