In her remarks today, ECB Governing Council member Isabel Schnabel alluded to the challenges of re-achieving the Eurozone’s inflation target, as inflation continues to decline faster than expected, putting pressure on the central bank to achieve price stability. In this context, other challenges emerge declining productivity and increasing service costs, which pose major risks to the European economy.
At her conference, Schnabel noted a growing consensus that there are increasing challenges that the region may face in the near future, with a particular focus on the impact of rising utility costs. With services inflation remaining at high levels, this is partly due to income growth and the sustainability of household savings, which has protected disposable income in difficult economic conditions.
Despite the efforts made, the Central Bank expresses its concern about fluctuations in price growth in the coming period, including the possibility of large and temporary increases in prices. In this context, attention has focused on services inflation, which has remained high at levels estimated at around 4%, partly due to households achieving increases in national income and increasing their savings, which has contributed to mitigating the impact of rapid inflation on disposable income.
In the context of monetary policy, the central bank is particularly focused on wage price developments, as it expects an interest rate cut in June after first-quarter data show a moderate improvement in labor costs. Looking to the future, the bank remains open to its policy options, in light of expectations of a slight improvement in monetary policy, and the markets are cautiously following developments in this policy. At the same time, the Eurozone remains facing its challenges, especially with regard to improving productivity, as the economy has been witnessing negative growth in this aspect over recent quarters.
The impact of inflation on interest rate cuts: the European Central Bank and the US Federal Reserve?
Will the European Central Bank precede the US Federal Reserve in cutting interest rates? This is the question that is frequent among traders in the world markets, especially after the recent data on inflation rates in the Eurozone and the United States. Eurostat data showed a slowdown in European core inflation to 2.9% during last March, which is in line with market expectations compared to 3.1% in February.
On the other hand, inflation data in the United States in March was a shock to the Fed, as the annual inflation rate rose for the second month in a row to 3.5% from 3.2% in February, which exceeded market expectations. Regarding the core inflation index, it stabilized at 3.8% in March, compared to expectations of a decline to 3.7%.
These data increased doubts about a cut in interest rates by the Federal Reserve next June, as Jerome Powell, Chairman of the Federal Reserve, expressed doubts that high inflation may delay any cut in interest rates until later this year, indicating the need to continue… Analysis and monitoring before making any decisions.
Jerome Powell went further when he added: “The latest inflation reports suggest that it will likely take longer than expected to achieve that confidence. For now, given the strength of the labor market and progress on inflation to date, it is appropriate to allow restrictive policy.” “With more time to act, and allowing changing data and expectations to guide us.”
Productivity rates have declined significantly in recent years, and some experts prove that this decline is partly due to companies’ strategy in periods of recession in which they retained the workforce, and the expected rise in growth rates is expected to improve productivity rates.
The impact of interest policies: expectations of a reduction in the next meeting and changes in financial markets
After the European Central Bank clearly indicated the possibility of starting to cut interest rates during its next June meeting, discussions about interest policies in the United States and the Eurozone were renewed. Last March, the US Federal Reserve continued to keep interest rates unchanged, which led to them continuing at levels ranging between 5.25 and 5.5 percent, while the European Central Bank also stopped raising interest rates in April, keeping rates at 4 percent. After a series of increases since December 2021.
With escalating tensions and changes in global financial markets, markets are beginning to digest expectations that interest rates in the United States will remain at high levels for a longer period, as a result of unexpected developments in inflation and employment. The response of stakeholders in the economy and markets to these changes is important, and will have profound effects on investor behavior and confidence.
For her part, Christine Lagarde, President of the European Central Bank, announced Europe’s independence from the United States with regard to interest policies, which sparked market optimism. Lagarde confirmed that interest rates are expected to be lowered at the next meeting, and although the US central bank may follow a different path, Lagarde’s statements caused relief in the markets.
The CEO focused on the importance of the new changes in the language of the European Central Bank, which indicate the possibility of reducing tightening in monetary policy, reflecting the growing optimism in the European economy.
He explained that this matter is still conditional and not a “pre-commitment” as Lagarde repeated several times, but she is trying to tell the market that there will be a reduction in interest rates at the next meeting, unless the data between now and the European Central Bank meeting in June show that inflation is not.
Economic growth in Europe and the United States: The impact of interest rate cuts and inflation
Economic growth in Europe has been struggling for more than 15 months, with three quarterly readings of zero, one negative and one of 0.1%, indicating a slowdown and an even balance in economic growth in the region. This situation reinforces expectations that the positive impact on inflation may be weak. Monetary policymakers in Europe are likely to be motivated to lower interest rates in order to stimulate economic growth.
On the other hand, economic growth in the United States remains remarkably strong, with six excellent quarterly readings recorded, reflecting American economic superiority. Although this strong growth is positive, it raises concerns about a re-escalation of inflation. This scenario may lead to the US Federal Reserve delaying lowering interest rates to monitor the economic situation and inflation.
Given the statements of central bank heads, Christine Lagarde, President of the European Central Bank, indicated the possibility of lowering interest rates next summer, while Jerome Powell, Chairman of the US Federal Reserve, stressed the importance of continuing to monitor future economic data. This positive monetary reaction shows that the orientation towards interest policies may differ between the two countries.
The move towards a rate cut in the Eurozone is due to weaker economic growth compared to the US, with manufacturing PMI data pointing to a slowdown in Europe while the US economy remains strong. Rate cuts in Europe are expected to accelerate as inflation declines faster than expected, raising hopes of achieving the European Central Bank’s 2% inflation target.
The decline in inflation faster than expected in Europe and the inflation in America exceeding expectations make the markets believe that the Bank of Europe may lead the forefront of major central banks to reduce interest rates, as inflation in the euro zone reached the level of 2.4 percent.
