The ECB’s fight against inflation: when will interest rates fall?

At first glance, top-level sport and monetary policy don’t have much in common, but they do have one thing in common: it’s all about starting at the right time. Regarding central banks, the question arises as to when they will lower interest rates again. The European Central Bank is already at the starting point, but is still hesitant to get going.

Carsten Mumm is sure it will be in the summer. He is chief economist at the private bank Donner & Reuschel. “We firmly assume that we will see the first interest rate cut by the ECB in June,” says Reuschel. “This has already been announced with relative clarity or at least promised by the central bank, Christine Lagarde, president of the ECB, and also by her colleagues.”

Stock markets prepare for interest rate cuts

This expectation has already caused prices in the stock market to rise, as falling interest rates are likely to boost the economy. The result: the DAX continues to trade at record levels even though the German economy is battling recession. New data from the Federal Statistical Office reinforce the prospect of an upcoming drop in interest rates: Inflation weakened further in Germany in March. According to preliminary figures, compared to the same month last year, it was 2.2 percent.

It is the lowest level in almost three years and therefore the inflation rate is very close to the two percent target. So why don’t monetary authorities cut interest rates sooner, for example when they make their interest rate decision next week? Edgar Walk, chief economist at Metzler Asset Management, emphasizes concerns that the economy will recover too strongly and a new rise in inflation will occur.

“Therefore, it is better to wait again until June, make sure that the downward trend in inflation continues and then start a cycle of key interest rate cuts that can then last,” Walk explains the bankers’ approach. central. “There is a big fear of making a mistake by reducing the key interest rate too soon.”

Core inflation remains persistently high

This is also because some areas of inflation are still persistent. This is reflected in core inflation. In March in Germany it was still 3.3 percent. At this point, items susceptible to fluctuations, such as food and energy, are excluded. Recently, the drivers of core inflation have been service prices, Mumm says.

“If we think back two or three years, we know that inflation started with the explosion of energy prices, raw material prices and supply chain bottlenecks,” the economist said. “In the next stage, goods and services increased very sharply. And the final stage we are seeing now is a significant increase in wages, which ensures that prices for services in particular continue to rise.”

Differences within the eurozone

Furthermore, the monetary authorities of the ECB do not only take the Federal Republic into account when making their decisions, although Germany is the largest economy in the eurozone. On Wednesday it will be known how the average rate has evolved in the 20 Member States in March. Countries like Croatia and Austria recently had to deal with inflation rates above four percent.

However, economist Walk assumes that the downward trend in inflation will also be confirmed for the monetary community. “We see that inflation in the euro zone has been falling for several months. We hope that it will continue to fall and that we will soon have inflation rates below two percent,” he predicts.

“Therefore, there is an expectation that the ECB will reduce key interest rates not only in June, but also at subsequent meetings.” It is not yet possible to say with certainty to what extent low interest rates in the euro zone could fall over the course of the year. One thing is already clear: for central banks, fighting inflation is anything but a sprint: it remains a constant race.