ECB cautions about further interest rate cuts

Wikimedia Commons/CC BY-SA 2.0 Author: Kiefer. from Frankfurt, Germany

The European Central Bank is working to push inflation in the Eurozone down to 2% but warned that it may take some time, as Germany keeps seeing slow de-inflation due to rising wages.

In a long expected move, the ECB cut interest rates after they reached record heights. However, ECB policymakers were quick to say that the process is still long. ECB board member Isabel Schnabel already called for a pause from possible further cuts in July. Reuters reported that allegedly the ECB is working towards further cut in September.

Commenting on the cut, ECB President Christine Lagarde said Thursday that it was not a one-off but the beginning of a lowering phase, without specifying too much on the time frame. ECB Vice President Luis de Guindos warned that inflation could still rise towards the end of the year.

The decision to cut was opposed only by Austrian ECB member Robert Holzmann who said that the bank will need to act with caution because inflation was proving to be stickier than predicted.

Also Germany echoed Austria’s caution. Bundesbank chief Joachim Nagel supported the cut as it fell in line with progress on inflation, but warned against further rate cuts. His bank said in a statement that “negotiated wages are expected to rise particularly sharply this year and continue to see strong growth thereafter,” as “inflation is proving to be stubborn, especially in the case of services.”

The Bundesbank predicted in its twice-yearly update on economic projections that inflation will be at 2.8% by the end of 2024, higher than the 2.7% predicted six months ago, and 2.7% in 2025, from a previous prediction of 2.5%. Growth is also expected to be slower than previously predicted, at 0.3% for 2024 from a previous prediction of 0.4% and at 1.1% in 2025 from a 1.2% forecast.

Despite this marginal slump, demand is raising in German industrial sector and that may push for the slow, shallow recovery that policymakers predicted.

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