The Council of the European Central Bank (ECB) will soon start lowering interest rates, as Governor of the Bank of Latvia and ECB Council member Mārtiņš Kazāks wrote in his article published by Makroekonomika.lv.
Last week the Council of ECB discussed Eurozone’s economic development forecasts and decided to maintain euro interest rates unchanged at 4%.
Kazāks says that inflation in Eurozone is becoming slower and slower, nearing 2%. At the same time, the weakness in the economy has remained for too long, and we are unlikely to see rapid growth this year. Although there is some slowdown is observed on the labour market, it remains strong and unemployment on a historical low. Wage growth is more rapid than price rise, and residents’ purchasing power is slowly recovering from the shock of inflation.
In February inflation in Eurozone was 2.6%. In Latvia it was 0.6%, said Kazāks.
At the beginning of the year, the price of natural gas was significantly below the predicted level. This was one of the reasons why the inflation outlook for the year was downgraded to 2.3%. This means that in the second half of the year inflation in Eurozone could come close to 2%. The forecast for 2025 and 2026 is 2% and 1.9% respectively. If the forecast comes to pass, the inflation target – around 2% in the medium-term in Eurozone – will be reached within approximately three years, which is an acceptable period of time for the medium term, explains Kazāks.
The governor of the Bank of Latvia reminds that inflation climbed above 2% target in 2021. Last year, Eurozone’s economy was balancing on the bring of recession, it remains weak, and this year GDP growth is expected at only 0.6%. For 2025 and 2026 it may become slightly faster – 1.5% and 1.6% respectively.
Kazāks explains that the main forces behind Eurozone’s economic growth is the stronger growth in global economy, which promotes Eurozone’s exports, wage growth that is more rapid than inflation, which contributes to consumption by households, as well as the gradual reduction of interest rates, which will promote investments and consumption.
“Nevertheless, these risks and uncertainty remain high. While inflation, I believe, has balanced risks, for economic growth they are downward aimed. Slower growth is more possible than faster growth,” said Kazāks.
Although the ECB Council did not discuss reduction of interest rates at the meeting in March, the discussion did commence about a possible rate reduction in the near future, said Kazāks.
If the economy follows the previously outlined forecast, the decision to start lowering interest rates could be made in the next couple of meetings, the Bank of Latvia governor predicts. A similar forecast is listed for financial markets, which estimates the first rate reduction at 0.25 percentage points as early as June.
Inflation went up very rapidly and then went down very rapidly, admits Kazāks. The goal of ECB Council is lowering inflation back to 2% and preventing it from going up again. Kazāks stresses that uncertainty remains high, so a certain degree of caution is warranted.
One of the reasons behind the lower than expected inflation is the price of natural gas, says the central bank’s government. Wight gas prices on a rise again, inflation jumps around again. Tension remains high on the labour market – although wage growth rates have become slower, they remain rapid and create risks for inflation to stay for longer.
“This is why, like before, in decision-making in the ECB Council, we will remain cool-headed and focus on existing data. The dragon of inflation is pinned to the ground, a little longer and we will win,” Kazāks wrote in his article.
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