Since the European Central Bank (ECB) began hiking interest rates 18 months ago, mortgage holders (and currency traders) have been watching closely for any hints of what the bank might do next.
Day in, day out, a policymaker at the ECB has appeared at an event and commented on the state of the European economy or the fight against inflation.
The financial newswires send flash headlines detailing the person’s comments, and we all try to read the tea leaves to figure out what it all means.
ECB vice-president Luis de Guindos was unusually clear, as these things go, on Wednesday, warning that the European economy is heading for another downturn, but, crucially, that inflation is set to remain stubbornly above the bank’s 2 per cent target in the months ahead.
So-called soft indicators pointed to an economic contraction in December, he said, which would confirm “the possibility of a technical recession in the second half of 2023 and weak prospects for the near term”.
Still, it is clear that inflation remains the number one priority for the ECB. If it felt it needed to stimulate demand, an interest-rate cut is an obvious way to do it. Instead, the fact that inflation is forecast to remain high should tamp down expectations of an early rate cut.
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Often there will be conflicting messages from members of the ECB’s executive council, which sets interest rates. The doves will want looser monetary policy, the doves to keep it tighter.
[ Markets subdued as rise in inflation dents hopes of early interest rate cutsOpens in new window ]
For now though, with markets at fever pitch in the expectation of an early rate cut this spring, the council seems united in wanting to kill off hopes for a cut in March. Just on Tuesday, France’s Francois Villeroy de Galhau said the ECB would cut, this year, once it sees inflation anchored at 2 per cent.
In other words, don’t hold out for a reduction in interest rates before the Autumn, unless the data changes dramatically.
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