By Hans Bentzien
DOW JONES–This much is certain: The European Central Bank (ECB) will further reduce its interest rates next year. But how fast and how far? That depends on many factors, the most important of which are the economic policy course of the new US president, the developments in Ukraine, which is attacked by Russia, and probably also the outcome of the government crises in Germany and France. And of course there are influencing factors that we don’t know anything about yet – the imponderables Financial marketsnatural disasters, coups…
The most recent update so far regarding the ECB came from its president Christine Lagarde: On the one hand, she sees the ECB on the verge of declaring “victory” over inflation. On the other hand, she warns of the still high inflation in the service sector and hopes that insurers will not thwart her plans by raising their premiums in January 2025 to a similar extent as in January 2024.
The choice of words in the ECB interest rate decision of December 16th suggests that the ECB is not taking a restrictive approach monetary policy needs more. This speaks for further interest rate cuts, because the key interest rate (3.00 percent) is well above the inflation rate (2.3 percent). However, opinions in the ECB Council differ about the necessary pace and extent of interest rate cuts, as do opinions about where the so-called neutral interest rate lies, below which monetary policy would even become “accommodative”.
An important factor influencing monetary policy will be the trade policy of the new US President. If the import tariffs come as announced, the ECB’s preliminary assessment is that this would initially have an inflationary effect. However, opinions differ regarding the longer-term effects. It is also important how the EU reacts to such import tariffs. Lagarde has repeatedly advised the Commission against simply retaliating against an actor as powerful as the United States.
Trump is also said to have had a major influence on the Ukraine war. If he were to cut off Ukraine’s money supply, the war would quickly be over. However, it doesn’t look like that at the moment. In fact, it is not at all clear what a “peace” with loss of territory would mean for Ukraine in macroeconomic terms.
In view of this situation, there is some evidence to suggest that the ECB will not abandon the principle of deciding on its interest rates from meeting to meeting for the time being. Most analysts expect “small” interest rate increases of 25 basis points at least until the end of June. The next interest rate decision is due on January 30th.
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(END) Dow Jones Newswires
January 02, 2025 02:15 ET (07:15 GMT)