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Europe’s inflation explosion is receding
FRANKFURT, Germany — Europe’s energy crisis sparked by Russia’s war in Ukraine has eased. Inflation has fallen significantly from its painful double-digit peaks. But no interest rate cuts are likely to occur at the European Central Bank’s meeting on Thursday, even as rising borrowing costs weigh on the stalled economy.
And wait times may be longer than many initially expected.
ECB President Christine Lagarde is likely to stress that the ECB wants to see conclusive evidence that inflation continues to fall slowly towards the central bank’s 2% target.
This is the view of analysts who follow the bank, and financial markets appear to be moving in line with it. The market had previously priced in the possibility of a rate cut as early as April, but that outlook has faded and the market is now pricing in a quarter-point rate cut in June.
A similar situation is emerging in the United States, with Federal Reserve Chairman Jerome Powell telling Congress on Wednesday that the central bank needs more confidence that inflation is under control before cutting interest rates. Fed officials have indicated they will cut rates three times this year, but Powell has not said when they will start cutting rates.
In Europe, inflation fell to 2.6% in February, well below the October 2022 peak of 10.6%. However, the consumer price index has been stuck between 2% and 3% for five months, raising concerns that the last mile of reaching the ECB’s target will be reached. The goal may be slower than expected.
The soaring food and energy prices that caused the inflation to flare up have subsided, but the inflation has spread to services, a broad sector of the economy that includes everything from movie tickets and office cleaning to tuition and health care. has spread.
Meanwhile, wages rose as workers began negotiating higher wages to make up for the purchasing power lost to rising inflation.
The price of natural gas, which is used to power factories, heat homes and generate electricity, has fallen to about 24 euros (about $26) per megawatt hour, not much different from the level it was before Russia began threatening Ukraine.
And oil prices have remained flat as Saudi Arabia and other members of the OPEC+ oil producing coalition maintain production cuts just enough to set a price floor.
Analysts at ABN AMRO Financial Markets Research said: “Given that most officials appear to be united on starting the easing cycle in June, the (ECB) Governing Council is They are likely to be satisfied with the price.” “So the purpose of post-meeting communication will be to avoid stirring up waves in either direction.”
Lagarde’s message is likely to be that “the central bank wants to see further evidence that domestic inflationary pressures are easing,” analysts said in a note.
The ECB raised its main policy interest rate from -0.5% to a record high of 4% in just over a year from July 2022. Rising interest rates make it more expensive to borrow and buy things on credit, curbing inflation and reducing demand for financial products. Goods. However, high interest rates may also weigh on economic growth.
There is pressure to cut interest rates due to the economic slowdown. The 20 countries that use the euro currency saw no growth in the fourth quarter of last year, after contracting by 0.1% in the previous quarter. Germany, Europe’s largest economy, is expected to grow by just 0.2% this year.
Complicating matters is the fact that this is not a typical recession, as unemployment remains low. Markets will be closely monitoring signals on when the first rate cut will occur.
Recent economic data has “increased pressure on the ECB to cut interest rates early,” Carsten Brzeski, head of global macro at ING Bank, said in an analyst note. It’s about pushing back on pressure and expectations. ”
He said Lagarde’s comments at the post-meeting press conference “will send a more accurate signal for a rate cut in June.”
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