The European Central Bank (ECB) has revealed that it intends to forge ahead with its policy plan despite the Federal Reserve’s decision. The message was delivered by ECB governing Council member Francois Villeroy de Galhau in an interview with Ouest-France. During the interview, he discussed the independence of the ECB under the leadership of Christine Lagarde.
Galhau mentioned that the ECB had been slashing rates as far as June before the Federal Reserve thought about it. While inflation numbers are down, the ECB said it will keep cutting rates. However, the recent victory of Donald Trump at the polls could stir economic trouble as soon as next year. He claims that Trump’s protectionist policies could be dire for America while slowing growth worldwide.
With the incoming chaos, economists are wary of the Fed’s ability to keep cutting rates. The Fed might be interested in one more cut by December, after dropping borrowing costs by 75 basis points over its last two meetings. However, there are indications that it might not make any cut in January. ECB, on the other hand, is unmoved, planning more cuts over its next few meetings after making huge cuts in the last few ones.
ECB is unmoved despite climbing inflation in the eurozone
Despite a drastic increase in inflation in the eurozone, the ECB remains practically unconcerned. According to forecasts, consumer prices surged by 2.3% in November, its highest in four months. Core inflation also rose 2.8% in the same period. Although it looks like a big problem, officials are calm about it as they don’t see a need to panic.
Greece central bank boss Yannis Stournaras has allayed fears, noting that it is under control and could even drop to the ECB’s predicted 2% figure by next year. In an interview with Bloomberg, he said they need to make cuts at every meeting till they achieve their desired rates. The ECB views 2% as its neutral rate, and Stournaras is eyeing it. Although he expects a 25-basis-point cut next month, he won’t be surprised with a 50-basis-point cut.
However, the confidence does not resonate with everyone on the Council. For instance, Austria’s Robert Holzmann worries about inflation, noting that it is not tamed yet. Meanwhile, he and other skeptics are convinced that the ECB’s easing spree is working to the desired effect. Investors are anticipating another cut next month due to the urgency around weak private sector activity in Europe.
Uncertainty remains despite agreement on more rate cuts
The last policy meeting of the ECB looks like a big one, with investors anticipating a quarter-point cut. While there is speculation that they could go bigger, Vice President Luis de Guindos has called for caution despite stressing the need for more cuts. Guindos said it is the next step, discussing the need for more cuts. However, he said the ECB cannot ignore uncertainty in markets worldwide.
Analysts hope the ECB will take breaks from more cuts next year, putting the bank in a difficult position. The bank would not be able to justify more cuts if higher wages continue to make inflation sticky. Still, analysts are sold on the ECB making more cuts. Stournaras noted that deposit rates could drop by 3% in December, saying it is the right response but admitted that it depends on how the Feds and markets respond.
New inflation data will be important, as new reports on economies in the eurozone will start coming in on Thursday. With the regional numbers expected on Friday, the ECB will have a full idea of where prices are going and how much energy costs are integral to the increase. If inflation stays within a manageable limit, it might continue its easing plans, but if it is high, it’ll need to reconsider. The bank is looking forward to stabilizing inflation, but further shocks in the future could force a rethink.
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