The European Central Bank (ECB), the US Federal Reserve and the Bank of England have all stopped increasing interest rates. This change in monetary policy could just mark a turning point in global economic fortunes. Does this mean that upward direction in interest rates has really come to an end?
The president of the ECB, Christine Lagarde, mentioned: ‘an abrupt rate increase cannot be followed by a rapid decrease without first crossing a plateau.’ The ECB decided last October to continue pedalling on that level and keep interest rates unchanged at 4.5%, after 10 consecutive increases, from 0% to 4.5% in just 14 months, the highest level since 2001.
This pause, which has also been applied by both the Federal Reserve and the Bank of England, has signalled optimistic expectations – we could be facing the end of interest rate increases.
The ECB could though maintain rates at current levels until 2025. It has no reason to rush a reversal of recent increases, with inflation still above the 2% target and moderate but positive economic growth providing some comfort to policymakers. On the contrary, an overly swift decrease in rates could lead to a spike in Eurozone inflation.
However, the ECB has already indicated that it sees the end of the road, confirming that inflation will subside ‘gradually over the next year’, finally getting closer ‘to the Governing Council’s objective of 2% in 2025.’
In the eurozone, inflation has cooled further to 2.4% according to data published at the end of November, its lowest reading since July 2021.
The rate is now far from the peak of 10.6% reached in October of last year and is approaching the ECB’s goal after seven months of consecutive falls.
The gradual easing of cost pressures and the effects of the ECB’s monetary policy could allow the general average inflation to fall from 5.4% in 2023 to 2.7% in 2024, 2.1% in 2025, and 1.9% in 2026.
The rise in rates, together with higher energy prices, has caused some economies, including in Germany and Scandinavia, to enter recession during 2023. That is one of the reasons why rate increases could now be coming to an end (along with inflation now seemingly tamed).
One forecast being talked about is that ‘the European Central Bank will hold interest rates steady well into next year … with a majority of economists the first cut will have to wait until at least July despite expectations of a euro zone recession.’ An earlier than expected rate reduction would likely require a recession deep enough to prompt easing even if inflation remains above the ECB’s 2% target.
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