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Eurozone inflation has fallen to within a fraction of the European Central Bank’s 2 per cent target, and the economy has ground to almost a complete standstill.
So why, asks Martin Arnold, is the ECB expected to leave interest rates at a record high when its governing council meets today?
Context: The ECB has kept its benchmark deposit rate at an all-time high of 4 per cent since last September. Senior policymakers have said they are likely to start cutting rates as early as their next meeting on June 6 if price pressures keep cooling as expected.
ECB president Christine Lagarde said last month she expected it to “make policy less restrictive” as long as the data coming in the next eight weeks show inflation still falling towards its target.
There are three factors that make ECB rate-setters nervous to act sooner.
The first is that while annual headline inflation fell to 2.4 per cent in March, this mainly reflects falling energy and fresh food costs and weak growth in goods prices. Services inflation, however, has been stuck at an uncomfortably high 4 per cent for five months.
The second worry is wage growth, which eased in the fourth quarter. The ECB wants this to continue in 2024, but early signs from Germany are troubling: its annual 9.7 per cent rise in negotiated wage growth including bonuses in March was almost the highest since 2011.
The final fly in the ointment is the US Federal Reserve.
Inflation has overshot forecasts in the US for three months, prompting investors to bet the Fed may not start cutting rates until November. This is unlikely to stop the ECB from lowering borrowing costs, but it will make it more uneasy about going first.
What to watch today
Eurogroup meets in Luxembourg.
Central European leaders meet for the Three Seas Summit in Vilnius.
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Publish date : 2024-04-10 07:00:00
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