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Key interest rate could fall faster than expected

The key interest rate could soon be cut again - but this time downwards.

(Bild: ferkelraggae - stock.adobe.com)

The era of record interest rates in the eurozone could soon be over. This is because the continuing decline in inflation in the 20-country community is likely to put the ECB's monetary watchdogs under increasing pressure to flip the monetary policy switch in the direction of lowering interest rates in the coming months - probably sooner than originally thought.

The deposit rate currently stands at 4.00 percent and the key interest rate at 4.5 percent. Although economists expect the ECB to keep its feet still once again at its interest rate meeting in Frankfurt on Thursday and not shake the key interest rates, experts are expecting a lively discussion about when the right time will come for a turnaround in interest rates.

Debate will be "fiercer than ever"
 "In view of the further decline in inflation and the still weak economy in the eurozone, the debate about interest rate cuts at the ECB meeting on March 7 will be fiercer than ever," says ING chief economist Carsten Brzeski. All eyes will also be on any changes in the monetary authorities' communication and indications of their next steps.

Consumer prices in the eurozone rose by just 2.6 percent in February within a year. In January, inflation had stood at 2.8 percent and in December at 2.9 percent. This means that the ECB's inflation target of 2.0% is moving ever closer.

Surprisingly low price pressure 
At next week's meeting, the monetary authorities will also receive new inflation and economic forecasts from ECB economists. These quarterly forecasts are considered an important decision-making factor for the monetary authorities. "As price pressure in the first quarter is likely to be lower than assumed in the ECB's projections, the inflation estimate for 2024 as a whole is likely to be revised slightly downwards," estimates DZ Bank analyst Christian Reicherter.

The December projections had still estimated 2.7 percent inflation for 2024. Economists at US bank Morgen Stanley are expecting a new forecast of 2.3 percent.

High wages cause concern for monetary authorities
ECB President Christine Lagarde believes that inflation in the eurozone will continue to weaken. The effects of past shocks, which have driven up inflation, will fade. And the tighter financing conditions are helping to push inflation down, she said recently in the EU Parliament.

However, the euro guardians are still concerned about the high wage pressure. "Despite the weaker economy and the gradually weakening labor market, wages remain the biggest risk to the inflation outlook," says Commerzbank chief economist Jörg Krämer.

Important milestone ahead in May
In recent weeks, some monetary authorities have pointed out that wage data from new wage agreements in the euro countries will not be available until May. This data is considered an important milestone for the ECB in order to be able to estimate how inflation will develop in the current year.

"We expect Ms. Lagarde to stick to the well-rehearsed script that the ECB must be cautious and prudent and wait for the critically important wage growth data in the first quarter before it can start cutting rates," says Andrzej Szczepaniak, European economist at Japanese bank Nomura.