Europe | The ECB and the unknowns of inflation

Summary

The ECB will most likely lower its interest rates at its monetary policy meeting this week. This decision has long been anticipated, suggested at previous meetings, and even clearly accepted in statements by the more hawkish members of the Governing Council.

Key points

• Key points:
• With inflation already on a downward path and given the low growth of the eurozone, for the ECB it is time to start moderating rates at historic highs (the deposit rate, the reference rate right now, at 4%).
• GDP growth data for the first quarter of the year came in better than expected at 0.3% quarter-on-quarter, well-distributed across most countries, including Germany.
• On the inflation side, there have been upward surprises in the first quarter of 2024, but data for April has been somewhat better, with seasonally adjusted monthly core inflation (a good way to look at the short term and move away from base effects) very low.
• However, the focus will not be on the June cut, but on what the path of further reductions from the monetary authority will be. The market is expecting two cuts this year of 25 basis points; analysts are expecting more.
• However, there are many elements of uncertainty about the pace of disinflation in the coming quarters and, therefore, about how fast interest rates will fall and the level they will reach.

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