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Inflation in the euro zone is falling faster than analysts expected – it fell below three percent in October and has remained there ever since. Most recently, inflation was within sight of the two percent limit, where, according to the ECB, price growth is likely to be in August 2021.
With the rapid easing of the wave of inflation comes the expectation of an equally rapid decline in interest rates, which not only affects the cost of loans and mortgages, but also how much savers receive from their deposits.
According to analysts contacted by the Bloomberg agency, investors will see four times this year, the first in June, and the interest rate should therefore be at the level of three percent by the end of the year. A quadrupling seems like a big jump, but initially experts predicted six steps and saw a rate of around 2.5 percent.
The ECB is likely to choose a more cautious strategy. Now central bankers are assessing how the latest interest rate hike from September last year will affect the economy and what impact the expected rise in wages will have on inflation.
Only when they are sure that the Eurozone is not threatened by a wage-price spiral and that inflation is really heading towards two percent will the first “cut” come.
A significant reduction in inflation is not planned
The ECB’s caution seems to be appropriate; the central bankers do not want to risk their reputation again, as they did when the price wave gained strength, while the ECB headquarters in Frankfurt said it was only a temporary phenomenon that will resolve itself.
Bank officials expect the sharp decline in inflation will not continue in 2024, partly because governments are supporting economies with spending from budgets – undermining the ECB’s efforts and forcing it to to keep interest rates slightly higher.
Economists outside the ECB also expect inflation to fall gradually and agree that it will take time to reach two percent. Especially when inflation jumped in December compared to November.
Core inflation, adjusted for volatile food and energy prices, is expected to remain higher this year. In 2025 it is likely to be slightly above the ECB target, namely at the level of 2.2 percent.
Be careful in the USA, the CNB is already cutting interest rates
The American Fed is also taking a similarly cautious approach. Even in the USA, inflation rose sharply in December, and central bankers there also expect interest rates to remain higher for a long time.
The Fed has been raising interest rates in 2022 and 2023 at a pace that will go down in economics textbooks alongside the anti-inflation efforts of the early 1980s. The interest rate is currently between 5.25 and 5.50 percent.
This year, however, will be characterized by relaxation. However, the Fed must balance the pursuit of a “soft landing” with targeting inflation without triggering a painful economic recession. And there are many risks lurking along this path, including the upcoming presidential election.
Central Bank Chairman Jerome Powell’s words in December indicate that while further tightening was underway in the fall, such a threat should no longer exist. Analysts assume that interest rates in the USA will be around 4.25 percent by the end of the year.
The Czech National Bank, then under the leadership of Governor Jiří Rusnok, was one of the first to react to the wave of inflation and began raising interest rates. After exchanges in the Bank Council, the Czech interest rate stopped at seven percent, from where the Bank Council began the reduction in December.
And from all indications, the gradual reduction is likely to continue this year. “According to the current monetary policy report from autumn 2023 published by the ČNB, the key interest rate in the Czech Republic is expected to fall over the course of the year. “In December 2024 we could be around the level of 3.5 percent,” says BHS chief economist Štěpán Křeček about domestic developments.
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