“The Governing Council believes that the ECB's reference interest rates are at levels which, if maintained for a sufficiently long period, will provide a substantial contribution to the achievement of the medium-term inflation target” This is what we read in the economic bulletin of the ECB published Thursday 21 March. At the meeting on March 7, the European Central Bank has decided to leave rates unchanged, but hinted that the long-awaited cut could arrive in June, when in all likelihood there will be sufficient data to think about a reduction in the restrictive orientation. An indication also reiterated by some members of the board of directors and by the president herself Christine Lagarde which confirmed on March 20: “By June we will have new projections available which will confirm or not the validity of the inflation trend we predicted in March. If these data reveal a sufficient degree of alignment between underlying inflation trends and our projections, and assuming transmission remains strong, we will be able to move into the easing phase of our monetary policy cycle and adopt a less restrictive policy."
ECB Bulletin: "Ready to adapt all tools to reach inflation at 2%"
In the economic bulletin published on 21 March the ECB writes that “Future decisions of the Governing Council will ensure that the ECB's key interest rates are set at sufficiently restrictive levels as long as necessary", it is read.
“The Governing Council will continue to follow a data-driven approach in determining the appropriate level and duration of restrictive guidance,” the document continues. “In any case, the Governing Council is ready to adapt all the tools at its disposal as part of its mandate to ensure that inflation returns to the 2% target in the medium term and to preserve the orderly transmission of monetary policy.”
ECB bulletin: inflation will continue to fall
Eurozone inflation will continue to fall. It is no coincidence that in the latest economic bulletin, the Eurotower revised inflation downwards again compared to February estimates, in particular for this year due to the lower contribution of energy prices.
“Overall inflation in the euro area fell further in February however domestic price pressures are still high, partly reflecting the vigorous growth in wages and the decline in labor productivity”, explains the document which then underlines: “. “In February, measures of longer-term inflation expectations remained essentially stable, remaining mostly around 2 percent” reads the bulletin which reports the latest estimates published by the ECB staff at the beginning of March. In particular, the ECB experts' macroeconomic projections for the euro area predict that overall inflation will gradually decline, standing on average at 2,3% in 2024, 2,0% in 2025 and 1,9% in 2026. In parallel, inflation net of energy and food goods was corrected downwards, placing itself in average at 2,6% in 2024, 2,1% in 2025 and 2% in 2026.
However, there are dangers. "Between upside risks to inflation include increased geopolitical tensions, especially in the Middle East, which could lead to a rise in energy and transport costs in the short term, causing disruptions in world trade. Furthermore, inflation could be at higher levels than expected if wages rise more than expected or profit margins show greater resilience”. Conversely, inflation could surprise on the downside if monetary policy curbs demand more than expected or in the event of an unexpected deterioration in the economic environment in the rest of the world.
ECB Bulletin: "GDP restarts in 2024, but risks oriented towards the downside"
The ECB expects euro area growth to pick up a cyclical recovery in 2024. “In the absence of further shocks”, it will initially be driven by the increase in income “which supports private consumption, in the presence of falling inflation and robust wage growth.
“In the medium term, the recovery will also be supported by investments“, thanks to the easing of the tightening of rates. The data “continue to point to modest growth” in the short term, but longer-term indicators show “signs of recovery“, we read in the March bulletin.
However, the risks to economic growth remain “oriented towards the downside“, explains the Governing Council of the European Central Bank, according to which economic expansion could be lower if the effects of monetary policy prove stronger than expected. “A weakening of the global economy or a further slowdown in international trade would also weigh on euro area growth. Russia's unjustified war against Ukraine and the tragic conflict in the Middle East represent significant sources of geopolitical risk."
On the contrary, growth could be higher if inflation fell more rapidly than expected and if the increase in real incomes led to greater than expected increases in spending, or if the expansion of the world economy was stronger than expected.
