The fall in inflation in Germany puts the ECB to work on the possible summer rate cut

The fall in inflation in Germany puts the ECB to work on the possible summer rate cut


The data advanced by the Federal Statistics Office (Destatis) this Tuesday highlights two things: that the Easter holidays did not affect the country’s disinflation and that the ECB will get to work for a possible lowering of rates of interest for this summer. Destatis expects prices in March to grow by 2.2% annually, compared to the 2.5% recorded in March. On the other hand, the underlying value (which is calculated excluding food and energy prices) would close March at 3.3%. According to the results available to Destatis so far, consumer prices are expected to rise by 0.4% compared to the month of February.

In the Destatis statement they reflect that, despite the brake on the prices of energy products starting in January of this year, as well as the increase in CO2 prices, which will affect the increase in the prices of fossil fuels and derivatives, energy prices were 2.7% lower in March. For their part, food prices also fell (-0.7%) compared to March 2023. It is the first time that a contraction has occurred since February 2015, when they fell 0.2% year-on-year and are also significantly below the rate of global price increase, according to Destatis.

Taking into account all these temporary results, experts believe that next month inflation will be the locomotive of Europe could reach 2% next month and then rebound a little in the following months. The global head of Macro at ING Economics, Carsten Brzeski, assured in a note that the first disinflationary tranche was favored by the fall in energy and food prices and that this second tranche “could be a more general cooling of the inflationary pressures as a result of the monetary policy of the European Central Bank and, therefore, weaker demandas illustrated by the monthly price variations that remained slightly below the historical averages for the month of March.”

In addition, the expert pointed out that the base effect known as the “Easter bunny effect”, that is, the increase in prices that the spring holiday would cause, “was barely visible this year.”

The drop in prices was motivated both by low demand due to monetary policy and by “less favorable base effects,” Brzeski said. Among those effects he listed Red Sea tensionswhich generated friction in the supply chain, such as government interventions and austerity measures.

“Our view is that inflation will be in the wider range between 2% and 3% instead of continuing in a straight line towards 2%,” said Carsten Brzeski.

The keys that lead them to think about that range are in the expectations of manufacturing sector sales prices. The Ifo institute published, precisely, this Tuesday that these expectations fell to 14.3 basis points in March, compared to 15 points in February, which places them at their lowest level since March 2021. Inflation continues to fall and should fall below 2% this summer. From the German perspective, there is no reason why the ECB should not cut interest rates soon,” says Timo Wollmershäuser, head of forecasts at the ifo.

In this sense, the ECB remains very cautious when talking about interest rate cuts. A priori, it might seem that these consumer price data are a relief, while at the same timethe eurozone economy has already hit rock bottom and that the loans have grown, they generate the perfect ecosystem to lower the price of debt next week to prevent the economy of the Old Continent from continuing to stagnate. But the institution chaired by Christine Lagarde remains very cautious regarding these macroeconomic figures and prefers not to rush.

“In this sense, the evolution of wages remains key and, as long as the economy does not fall off a cliff, the ECB will remain firm next week, awaiting more data and the June meeting,” explained Carsten Brzeski.

The truth is that Cristine Lagarde herself confirmed at the beginning of the year in an interview with Bloomberg Television that rates will begin to fall starting this summer. Currently in the eurozone they are at relatively high levels, with the deposit rate (the most relevant rate) at 4%.

But what Brzeski highlights in his comment is true: “The debate at the next ECB meetings will no longer focus on ‘yes’ or ‘no’ but on ‘when’ and ‘how much’ it should cut interest rates.”

The projections of the entity’s experts indicated that the inflation target of 3% will reach in the second half of 2025while growth would be above potential between next year and 2026. “Taking into account how the ECB models work, the ECB would have to cut rates by about 100 basis points to reach these, which the ECB I would call it favorable macroeconomic results,” says the ING expert.

Thus, the rate cut could be set in stone in June, taking into account Lagarde’s statements, so the debate at the summer meeting will be the sequence and size of said cut. “We believe that as long as the eurozone economy is not in recession and the risks to inflation and the outlook for inflation remain on the rise (either due to cyclical but also structural factors), the ECB will opt for a “slow hand” policy of rate cuts of 25 basis points each quarter,” Brzeski predicts, as any more drastic cuts would “smack of panic” and require a more adverse growth outlook for the eurozone.



Source link