The European Central Bank (ECB) seems far from excited about cutting interest rates next month.
Philip Lane, the ECB’s chief economist, has told us that while some progress has been made in dealing with inflation across the Eurozone, the ECB is still a long way from being ready to loosen its grip on interest rates.
He emphasized that the bank’s current tight stance on monetary policy would need to stick around for a while longer. “The return to target is not yet secure,” Lane said.
The ECB kicked off the process of easing its policy earlier than most central banks in advanced economies. Back in June, they slashed the key deposit rate by a quarter-point. That was the first time they had made such a move in almost five years.
But if anyone thought that was a sign of things to come, Lane’s recent comments should put that notion to rest. He basically said that borrowers hoping for some relief anytime soon are likely out of luck.
The market had been shaking with expectations that the ECB would cut interest rates twice more this year, with the next move likely in September. Lane’s remarks come as his counterparts across the Atlantic and in the UK are having similar debates.
In the US, Federal Reserve Chair Jay Powell dropped his strongest hint yet that a rate cut could be on the cards for September. At Jackson Hole, he said:
“The time has come for policy to adjust.”
Meanwhile, over in the UK, Bank of England Governor Andrew Bailey sounded a similar note of caution. Although he expressed some optimism about the recent dip in inflation, Bailey wasn’t ready to declare victory just yet. He said:
“It’s too early to declare victory.”
The Bank of England recently cut rates in a closely contested vote in August. They’re expected to hold rates steady in September, with another cut potentially on the table for November.
But like the ECB, the Bank of England seems to be more concerned with ensuring that inflation doesn’t rear its ugly head again than with rushing to provide relief to borrowers
Lane warned against keeping rates too high for too long, as this could lead to chronically low inflation over the medium term. That would be “inefficient in terms of minimizing the side-effects on output and employment,” he said.
Investors seem to be picking up on this cautious mood. Long-term inflation expectations in Europe have dropped to their lowest levels in nearly two years.
This means that the market believes central banks can continue to lower interest rates without triggering a resurgence in inflation.
The Eurozone’s five-year, five-year forward inflation swap—a key indicator of market expectations for price growth over the second half of the next decade—dipped below 2.1% this week for the first time since October 2022.
That’s a noticeable drop from just over 2.3% last month.