European Central Bank President Christine Lagarde: Inflation is declining in Europe, but the ECB is not yet ready to cut interest rates.
Inflation in the 20-nation euro zone fell to 2.5% in June but remains above levels preferred by the European Central Bank, which is in no rush to cut interest rates further after its first tentative cut in its benchmark interest rate, the research firm said. Associated Press
(AP) report.
Tuesday's figure was down from 2.6% in May, welcome news as inflation continues to fall from a peak of 10.6% that sapped consumer purchasing power and plunged Europe's economies into near-zero growth for months.
but AP The report highlighted that key indicators remain at levels suggesting that inflation is likely to stagnate between 2% and 3% for the time being. More narrowly focused services price inflation was 4.1%, unchanged from the previous month.
of AP The article also suggests that the ECB is being cautious to ensure inflation is under control before cutting rates because the US Federal Reserve is holding back from cutting rates from their current high levels. Generally, central banks do not want to cut rates too early only to realize too late that inflation is more persistent than expected and reverse course — a mistake that would not only make it harder to squeeze inflation out of the economy, but also undermine the central bank's credibility.
Higher interest rates are intended to keep inflation down by making it more expensive to borrow money to buy goods and invest in new factory capacity. That reduces price pressures, but it can also slow growth. The ECB and Fed are walking a tightrope between ensuring inflation is kept down without plunging the economy into recession.
European Central Bank (ECB) President Christine Lagarde said in a speech on Monday that the bank must first ensure that inflation is well under control before cutting rates again, following the bank's first interest rate cut of 0.25 percentage points at its June 6 meeting, taking the central bank's policy rate to the current 3.75%.
“It will take time to have enough data to be confident that the risks of above-target inflation have passed,” Lagarde said in a speech at a European Central Bank conference in Sintra, Portugal. While euro zone growth is uncertain, she said the job market remains strong with low unemployment — a sign the economy is holding up even at interest rates much higher than before.
nevertheless, AP The report said rising interest rates are holding back credit-sensitive sectors such as real estate and construction. Mortgage rates for home purchases have risen, ending years of house price growth in the euro zone. But savers are feeling relieved from a previous period of zero interest rates when some banks charged negative interest rates on savings – or a fee for depositors to keep their money parked there.
Lagarde said the first rate cut in June would only “ease the level of restrictions” on the economy and not be the start of a series of rapid rate cuts. She said decisions would be made based on incoming data at each meeting.
Analysts say a rate cut is unlikely at the central bank's July 18 meeting and that discussions on interest rates will remain focused on the central bank's September meeting.
The European economy has struggled with near-zero quarterly growth, rising just 0.3% in the first three months of the year, and recent indicators such as S&P Global's Purchasing Managers' Index have shown that factory activity in the euro zone is shrinking.
of AP The report said rising energy prices have sapped consumer purchasing power and slowed the European economy, which was only just beginning to recover thanks to new labor agreements and wage increases. Energy prices soared after Russia's full-scale invasion of Ukraine nearly cut off natural gas supplies, and the increase has spilled over into other goods and services, including everything from medical bills and concert tickets to haircuts and restaurant bills.
