European Central Bank (ECB) Interest Rate Cut: Is Inflation Making a Comeback?
- The Daily Glitch
- Jun 7, 2024
- 2 min read
The European Central Bank (ECB) has announced a reduction in the main interest rate by 25 basis points, from 4% to 3.75%. Canada, Sweden, and Switzerland have also recently followed a similar path, loosening their reins ahead of the United States and the United Kingdom. This development is noteworthy, as historically, the U.S. has always led in cutting rates. The ECB had held rates steady for the past nine months, until now.
The ECB press release outlines their actions and expectations:
"At the same time, despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year. The latest Eurosystem staff projections for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections. Staff now see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. For inflation excluding energy and food, staff project an average of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026. Economic growth is expected to pick up to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026."
The question is, why now? Is inflation really under control? What are the expectations moving forward? The ECB is predicting inflation will average under 2.5% by 2026. This is a very optimistic forecast and may seem overly simplistic.
The United States inflation rate year-over-year provides an interesting comparison. During the 1940s and 1970s, once inflation had risen significantly, it remained difficult to control, often resulting in a second wave of inflation. In both decades, it took about five years for a second inflation peak to occur. Will history repeat itself, leading to another peak around 2027?
The Bank of England provides data on unemployment in the UK during these periods. At the end of WWII, the UK had one of the lowest unemployment rates, which then increased substantially. Again, during the stagflation period of the 1970s, the UK faced a significant rise in unemployment.
It is also insightful to examine how the markets performed during these periods. The ECB's prediction of no substantial inflation growth in 2026 appears quite optimistic, given the significant increase in the monetary supply since the pandemic. We will have to observe how this situation progresses, but it seems people worldwide are feeling the strain of the cost of living. Easing monetary policy now is likely a sign that we are approaching some critical points. The remainder of 2024 should indeed be an interesting period.
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