European Central Bank Combats High Inflation

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The European Central Bank in April 2024, a time where inflation rose by 2%. (Michael Probst/AP)

The European Central Bank has lowered interest rates following prior high peaks in an attempt to combat high inflation.

Of the 20 countries which all use the euro, inflation has reached over the ECB’s two per cent target as of recently, from previously falling over 10 percent in 2022. However, such progress has decreased significantly, with combats to inflation seeming increasingly muddled.

ECB President Christine Lagarde said that such inflation has sufficiently settled so the European Central Bank is able to begin lowering rates. However, Lagarde has refused to say how quick or strong any future rate cuts could be, with inflation at 2.6% in May, and anticipated to stay over ECB 2% target for next year.

“We will keep policy rates sufficiently restrictive for as long as necessary,” she explained, while also adding, “We are not committing to a particular rate path,” and “Are we today moving into a dialing-back phase? I wouldn’t volunteer that.”

The European Central Bank has decreased the deposit rate to 4.0 percent from a previous 3.75 percent, a record cut, as well as the first cut since 2019.

However, the ECB has also raised inflation forecasts for this and next years, concerned that more rate reductions need to be based on further data, as well as that borrowing costs are to be kept high enough to deal with prices.

“Despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year,” the ECB stated.

Many economists expect that the ECB will keep on reducing the its policy rate in upcoming months, dropping the rate to 2.50% percent by the end of 2025. Although they are just see two further reductions this year in September and December. 

“Further cuts in September and December remain our central case,” HSBC economist Fabio Balboni explained in a note. “But if the recent resilience in services inflation proves sustained, we see increasing chances that the ECB might have to be more cautious on the way down.”

Written by Kevin Han

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