The ECB is really done raising rates, here’s why

ECB: the rate rise could really be over according to the declarations of Eurotower member Isabel Schnabel.

The official, known as one of the European Central Bank’s most hawkish voices, said inflation was showing a “noticeable” slowdown, a U-turn that is pushing markets to increase bets on a rate cut. interest already in March.

Schnabel, who just a month ago had insisted that interest rate increases should remain an option because the “last mile” of the fight against inflation could be the hardest, said he changed his position after three data consecutive unexpectedly favorable inflation rates.

The markets, which were already discounting the decrease in the cost of money starting from the spring, now have one more element to bet on an accommodating ECB. The wait is all for the next meeting on December 14, when the projections on inflation and GDP will also be updated from Frankfurt.

ECB rates, stop increases: what Schnabel said

The European Central Bank can rule out further interest rate hikes given the notable decline in inflation and policymakers are not expected to maintain a high and stable level of borrowing costs until mid-2024, said Isabel Schnabel, member of the ECB board in an interview on Reuters.

The reference is to the latest data on consumer prices, which fell to 2.4% last month, from over 10% the previous year, after a record series of rate increases. The 2% inflation target is now closer and policymakers’ warnings that there could be another two years of persistent price growth seem unlikely.

“The November flash release was a very pleasant surprise”, Schnabel reported. “Most importantly, underlying inflation, which has proven more tenacious, is now falling faster than we expected...Overall, inflation developments have been encouraging”.

While effectively ruling out another rate hike, the official maintained a more cautious approach on the prospect of a rate cut that traders are betting on.

“We have to see what happens”, he said. “We have been surprised many times in both directions. So, we should be careful about making statements about something that will happen in six months”.

Schnabel is the first of the ECB’s political hawks to signal a change in perspective. His comments come after Bundesbank chief Joachim Nagel said November data had not changed his mind and that a rate hike was still a possibility.

ECB, rates and forecasts for the Eurozone: what to expect?

Rates are expected to remain unchanged for the second time when the ECB meets on December 13 and 14. Also in focus will be the new economic forecasts which will extend for the first time until 2026.

UBS economists led by Reinhard Cluse said in a note on Monday that the ECB will likely have to lower its growth and inflation outlook in 2023 and 2024.

Markets, meanwhile, are pricing in more than five deposit rate cuts of 4%, the first of which will take place as early as March. However, the fight against prices has not yet been won according to Schnabel and further progress on underlying inflation and slower wage growth is needed to be out of danger. The ECB is also waiting for data to see whether companies’ profit margins will continue to shrink.

“We must not prematurely declare victory over inflation”, he said. “We are on the right path, but we must remain vigilant”.

Schnabel also said that weak growth resulting from ECB rate hikes is helping fight inflation, but that a deep or prolonged recession is unlikely, with recent data supporting expectations of a recovery.

In this rather uncertain context, the European Central Bank may indeed be done raising interest rates. The demand for loans, the surge in mortgage repayments, the stagnation, and the danger of stagflation have also come under observation. For all these factors, the ECB will probably begin to study a less aggressive strategy for its next decisions.

Original article published on Money.it Italy 2023-12-05 12:19:53. Original title: La Bce ha davvero finito di alzare i tassi, ecco perché