Eurozone in Inflation Dilemma: Is the ECB Considering an Interest Rate Cut?

The Eurozone is facing an economic challenge: instead of excessive inflation, the opposite is now threatening. Experts are concerned that the European Central Bank (ECB) might be confronted with too low inflation. After the record-high inflation figures that forced the ECB to raise interest rates to 4 percent in September 2023, a decline in price increases is now emerging. Many already expect the ECB to lower interest rates to 3.25 percent in October. This would be an earlier adjustment than originally expected in December. The markets have factored in another decline in interest rates, with a rate of 1.7 percent expected by the second half of 2024. September recorded an annual inflation rate of 1.8 percent, falling below the ECB's 2-percent target for the first time in over three years. Jens Eisenschmidt from Morgan Stanley, formerly with the ECB, emphasizes the challenge of keeping the inflation rate above 2 percent. He forecasts a halving of the key interest rate by December 2025, although he considers further easing possible. In the years up to 2021, too low inflation was more often a problem for the ECB. Out of 120 months, inflation fell below the target in 93 months. The ECB responded at the time with unconventional measures such as bond-buying programs and negative interest rates. The ECB warns that a further drop in prices could trigger a deflationary spiral. This situation would be harder to manage than rising inflation. ECB staff forecasts expect the 2-percent target to be reached only in the fourth quarter of 2025. Nevertheless, there are concerns that the forecasts are too optimistic. Yannis Stournaras from the Bank of Greece suspects that the target could already be reached in the first quarter of 2025. Temporary increases in the inflation rate at the end of the year are, however, statistical outliers caused by fluctuating oil prices. Pointing to the weak growth forecast, an insider adds that the risk of missing the inflation target is a significant factor in the ECB's considerations. ECB President Christine Lagarde confirmed that the approach to the 2-percent inflation rate influences their strategy. Nonetheless, Sebastian Dullien from the Macroeconomic Policy Institute warned that the ECB is acting too slowly and has misanalyzed the economic drivers of inflation. The rising interest rates could further burden the already weak economy.