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ECB chief pours cold water on hopes for imminent interest rate cuts

Stubbornly high inflation may put on hold any plans for near-term interest rate cuts in Europe, Christine Lagarde, the president of the European Central Bank (ECB), said in an interview with Bloomberg News Wire on Wednesday.

Speaking from the World Economic Forum in Davos, Switzerland, she cautioned against hasty rate cuts for fear of causing inflation rates to rise again, arguing that the economic risk of cutting rates too quickly was greater than the risk of leaving them too high.

“We are going in the right direction in our fight against inflation,” Lagarde wrote on social media platform X on Wednesday. “But we are not going to shout victory before we are confident that inflation is sustainably at 2 percent.”

According to fresh data from Eurostat, the European Union’s (EU) statistics agency, yearly inflation in the eurozone was 2.9 percent in December, up from 2.4 percent a month earlier. That is far below the all-time peaks recorded in late 2022, but it also represented a significant one-month rebound after a steady decline in recent months.

The highest yearly inflation rates for December were recorded in Slovakia (6.6 percent), Croatia (5.4 percent) and Austria (5.7 percent).

In Britain, which is not an EU country and not part of the eurozone, inflation was even higher, standing at 4 percent in December, up from 3.9 percent in November, according to data released Wednesday.

That was the first inflation increase since February 2023, said the country’s Office for National Statistics.

Fighting inflation, which has been fueled by an energy crisis arising from the Ukraine situation, the ECB raised interest rates in ten consecutive meetings before leaving the key deposit facility rate unchanged at 4 percent — the highest level since the creation of the euro currency in 1999.

The Bank of England started rate hikes earlier than the ECB and kept at it longer, raising rates in 14 consecutive meetings to a 15-year high of 5.25 percent before leaving them unchanged since August.

Higher interest rates are the government’s main tool to fight inflation, since doing so reduces the money supply and makes it more attractive for investors to hold onto their savings rather than spend it. But it is a balancing game that may undermine economic growth. By the same token, lowering interest rates increases the money supply and can boost economic activity.

As inflation started to slow down across the eurozone and elsewhere in Europe in late 2023, investors began to speculate that the ECB might be prepared to start lowering record-high interest rates soon. However, Lagarde’s remark has dismissed such hopes.

“Inflation rates are slowly and progressively stabilizing, and the prognosis is for a further decrease in interest rates in 2024,” Domenico Lombardi, director of the Policy Observatory at the LUISS University in Rome, told Xinhua. “But policymakers are being cautious because the state of European economies is fragile due to multiple economic shocks in recent years.”

Lombardi blamed the coronavirus pandemic, the energy crisis, and a slowdown in global trade for the economic situation.

Financial markets responded negatively to the latest trends of financial policies, with most of Europe’s major stock exchanges down by at least 1 percent in heavy trading on Wednesday and the euro currency losing ground to the U.S. dollar and other major currencies. ■

Famagusta Gazette