In her statement following the recent European Central Bank's (ECB) decision to cut interest rate by 25 basis points, President Christine Lagarde emphasized the need for continued vigilance and flexibility in monetary policy.
“We will continue to follow a data-dependent and meeting-by-meeting approach […] Our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path”, she stated last September 12, during the announcement press conference1.
In a scenario that is still fluid and presents risks of different and opposite nature, the ECB's rationale for the rate cut appears to be consistent. The Eurozone economy has shown signs of weakness, with growth slowing and inflation easing. By lowering borrowing costs, the central bank aims to stimulate lending, boost investment, and ultimately revive economic activity.
On the other hand, while it is true that inflation has moderated, it remains above the ECB's target of 2%. Furthermore, the underlying causes of the Eurozone's economic slowdown are complex and may not be fully addressed by monetary policy alone.
So, balance and flexibility are needed, also because the ECB acts considering the eurozone as a whole, but this is composed of different countries and different economies. We picked some opinions from different markets, in order to have a better feeling about what is going on.
According to Simone Capecchi - Executive Director at CRIF: “Looking at the Italian market, the ECB's decision to lower rates is another breath of fresh air for households and businesses. Mortgage requests in the first eight months of 2024 grew by 6 percent. This increase, particularly from households, is mainly due to positive expectations related to rates, and reduced uncertainty. The ECB's decision also goes a long way toward encouraging a pickup in demand for loans, which, after a poor first half of the year, were up 4.3 percent in August”.
Outside the euro area, however, the ECB's decisions do not seem likely to have major repercussions, at least in the immediate term.
“We expect a stagnation or, at best, a slight reduction of the interest rates related to mortgage loans, which are currently just below 5%”, says Petr Kučera, Country Director, CRIF – Czech Credit Bureau regarding the Czech Republic. “More or less the same we believe will happen with regard to consumer loans. Current interest rates range are from 6.9 percent to 9.5 percent per year, depending on the type and provider of the loan. We expect their stagnation until the end of 2024”.
What’s next?
As much as ECB President Christine Lagarde has stated that the institute she heads will not follow predetermined lines but a “data-dependent” approach, many economists are already looking ahead to an upcoming rate cut in December.
A call for a bolder approach has come from some experts, who have pointed out that the ECB's own mandate, which is focused on controlling inflation, should be revised to be more supportive of the economy.
Our followers on LinkedIn, whom we asked for their views on what choices the ECB should make in the future, seem to agree with the Frankfurt institution's current cautious approach.
In fact, about 60% of respondents believe it wise to continue with small cuts, in a balance between stimulating the economy and being cautious about inflation risks.
At the same time, a significant percentage, close to 30%, of opinions in favor of a stronger approach of more decisive cuts emerges, while only one in ten respondents believe that it is necessary not to proceed with further cuts.
1 www.ecb.europa.eu/press/press_conference/monetary-policy-statement/2024/html/ecb.is240606~d32cd6cc8a.en.html
